Circular No. 16/CA/PPI/PPM/11-12, dated 31-1-2012
On 18th June, 2010, the Authority had put up a draft in the nature of a Discussion Paper on the need to prescribe standards and procedures for Needs Analysis for sale of life insurance policies. Needs Analysis by the intermediaries and the insurance companies is necessary before effecting the sale of a life insurance policy in order to ensure that the product that is proposed to be sold is suitable for the prospect and meets his or her needs.
It is proposed to mandate carrying out Needs Analysis for life insurance policies. Insurers shall, in terms of Regulation 4 (1) of the IRDA Regulations for Protection of Policyholders’ Interests, 2002 adopt a standard Proposal cum Needs Analysis form.
It is also proposed to issue guidelines to life insurance companies to develop and implement a Prospect Product Matrix that will serve as a tool to assess whether or not the proposed sale is based on the Needs Analysis. This shall currently be made applicable to all life insurance policies (Traditional, ULIPs, Pension and Health) sold as individual policies.
The Draft Guidelines, along with an illustration of a Prospect Product Matrix (Annexure B) and the Standard Proposal cum Needs Analysis form (Annexure A) are attached. Stakeholders are requested to send in their comments on the draft guidelines as soon as possible but definitely on or before 29th February, 2012. Feedback may be sent to firstname.lastname@example.org
DRAFT GUIDELINES ON DEVELOPMENT AND IMPLEMENTATION OF PROSPECT PRODUCT MATRIX BY LIFE INSURANCE COMPANIES
Sale of policies based on suitability or needs of the prospect and persistency trends of these policies have a positive correlation. It is important and necessary for insurers to have in place a Suitability Index (or a Prospect Product Matrix which term shall be used hereinafter) that can serve as a self governing tool to assess the quality of sale. With experience, the Prospect Product Matrix will get refined leading to constant improvements in persistency and greater customer satisfaction.
II.1. In order to ensure that every life insurer develops and implements a Prospect Product Matrix, the Authority considers it necessary to issue broad guidelines on the subject, in terms of Section 14 of the IRDA Act, 1999.
II.2. The Objective of these guidelines is to set standards and procedures for development and implementation of a Board approved Prospect Product Matrix by insurers which shall be followed by the direct sales personnel of insurers and their agents and brokers. In the case of brokers, insurers may ensure that the expected minimum requirements are met with as brokers may deal with more than one insurer and may want to develop their own matrix/process. Insurers are required to establish a system to supervise recommendations made by their sales personnel as well as agents and brokers to ensure that the needs and financial objectives of consumers are appropriately addressed. These guidelines shall currently be applicable to all life insurance policies (Traditional, ULIPs, Pension and Health) sold as individual policies.
111.1. Recommendation: ‘Recommendation’ means advice provided by an agent or broker or an insurer where no agent or broker is involved, to an individual consumer that results in a purchase of a life insurance policy in accordance with that advice.
111.2. Suitability: ‘Suitability’ is a determination that, based upon a particular prospect’s risk profile, financial situation, investment objectives and investment experience, a product is appropriate for that prospect.
IV. Obligations of insurers, agents and brokers to determine suitability:
IV.I. An insurer or a distributor must make reasonable efforts to obtain a consumer’s suitability information prior to making a recommendation. Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including the following:
(b) Annual Income
(c) Financial resources used for funding the purchase of the life insurance product
(d) Intended use of the life insurance product
(e) Financial objectives with time horizon
(f) Existing assets including investment and life insurance holdings
(g) Liquidity needs
(h) Liquid net worth
(i) Tax status
(j) Risk tolerance
(k) Such other information used or considered to be reasonable by the insurer in making recommendations to the consumer.
Note: Annexed to these guidelines (Annexure B) is an illustration of a Prospect Product Matrix and a Standard Proposal cum Needs Analysis Form (Annexure A) .
IV.2. Based on the suitability of information gathered from the prospect, the Insurer or Agent or Broker must have reasonable grounds to believe that the product being recommended to the prospect is suitable for him/her.
IV.3. In recommending the purchase of a life insurance product, the Insurer or Agent or Broker shall ensure the following:
(a) The prospect has been informed of the various products available and the details of the various features of the particular product being recommended. This would include and not be limited to the benefits, the various charges such as surrender charge, administration and all other charges as applicable, market risks etc—in other words all relevant features of the product necessary for the prospect to make the right decision.
(b) The insurer or agent or broker believes that a particular product would suit the needs of the prospect and that the prospect would benefit from purchasing such a product.
IV.4. It shall be mandatory for all life insurance companies to adopt a standard Proposal cum Needs Analysis form as prescribed by the Insurance Regulatory and Development Authority in terms of Regulation 4 (1) of the IRDA Regulations on Protection of Policyholders’ Interests, 2002.
V. Exception from obligations listed in III above:
V.I. No insurer or agent or broker shall have any obligation to a prospect related to any recommendation where a prospect
(a) Refuses to provide relevant information requested for by the insurer or agent or broker. The Agent/Broker and the insurer shall certify such refusal on the proposal cum needs analysis form.
(b) Decides to purchase a product that is not based on a recommendation of the insurer or agent or broker. A declaration to this effect needs to be obtained from the prospect on the proposal cum needs analysis form.
(c) Fails to provide complete information. The Agent/Broker and the insurer shall give a declaration to this effect.
VI. Insurers to establish supervisory procedures:
VI.I. An insurer shall establish a supervision system that is reasonably designed to achieve compliance with these guidelines including but not limited to the following:
(a) The insurer shall maintain reasonable procedures to inform insurance agents and brokers of the requirements of these guidelines and of the Prospect Product Matrix developed and adopted by them and the forms and details that need to be collected for the purpose of suitability analysis and making a recommendation.
(b) The insurance agents and brokers shall be adequately trained to determine suitability based on the Prospect Product Matrix developed and adopted by the insurer.
(c) The insurer shall maintain procedures for review of each recommendation prior to issuance of a product that is designed to ensure that there is a reasonable basis to determine that a recommendation is suitable. Such review procedures shall include a screening system for the purpose of identifying selected sale transacitons for a detailed review. Such review may be accomplished electronically or through other means including but not limited to physical review.
(d) The insurer shall maintain reasonable procedures to detect recommendations that are not suitable. This may include, but is not limited to, confirmation of suitability information, systematic consumer surveys, verification calls or interviews, confirmation letters and programs of internal monitoring. An insurer may apply sampling procedures for confirming suitability information after issuance or delivery of the product.
(e) The management of the insurer shall provide periodical reports to the Policyholder Protection Committee which shall give periodical reports to the Board of the insurer. The report shall contain details of audit review of design of the Prospect Product Matrix, of the effectiveness of the supervision system, the deviations found and corrective action taken or recommended. The reporting system shall also include a periodical report of instances of mis-selling arising out of non-compliance of the Prospect Product Matrix, apart from carrying out a review of cases of mis-selling based on policyholder complaints.
VII. Record keeping:
VII.I. Insurers, agents and brokers shall maintain and make available to the Authority records of information collected from the prospect and other information used in making the recommendations that were the basis for insurance transactions for five years after the insurance transaction is completed by the insurer.
VII.II. The records may be maintained in physical or electronic form or any process that accurately reproduces the actual document and can stand legal scrutiny.
Agents shall be adequately trained on the Prospect Product Matrix adopted by the insurer. Brokers shall also be given the necessary inputs for sale of the products of a particular insurer. Further, insurer shall ensure that agents, brokers and direct sales personnel are given thorough training regarding the various specific products of the insurance company.
IX. Effective Date/Compliance Date
These guidelines shall take effect from 1st April, 2012.
PROPOSAL CUM NEEDS ANALYSIS FORM
|Name of Insurer||:|
|Agency/Broker Name and contact details||:|
|Licence No. & Validity Details||:|
DETAILS OF PROSPECT
|1. Basic Information|
|Date of birth|
|Identification proof (PAN must where premium exceeds Rs.50,000)|
|State of health||Excellent/Very good/Good/Moderate/Poor|
|Are you Politically exposed?|
|Why do you want to take this policy?|
|2. Family details|
|Number of dependants|
|Details of dependants||1||2||3||4||5|
|Date of Birth|
|State of health ( Excellent/Very good/Good/Moderate/Poor)|
|Whether financially dependent|
|Any scope for expansion of family||Yes/No|
|3. Physical/Medical Information (Questionnaire)—for each covered person|
|Do you have any physical deformity/handicap/congenital defect/abnormality?||YES/NO|
|Are you currently undergoing/have undergone any tests, investigations, awaiting results of any tests, investigations or have you ever been advised to undergo any tests, investigations or surgery or been hospitalized for general checkup, observations, treatment or surgery?||YES/NO|
|Have you ever been treated or hospitalized for Cancer, Tumor, Cysts or any other growth?||YES/NO|
|Have you ever been referred to an Oncologist or Cancer hospital for any investigation or treatment?||YES/NO|
|Did you have any ailment/injury/accident requiring treatment/medication for more than a week?||YES/NO|
|Have you ever been absent from work for more than a week in last 2 years due to any illness?||YES/NO|
|Were you or your spouse ever tested for Hepatitis B or C, HIV/AIDS or any other sexually transmitted disease?||YES/NO|
|Have you ever suffered Chest pain, Palpitation, Rheumatic fever, Heart Murmur, Heart attack, shortness of Breath or any other Heart related disorder?||YES/NO|
|Have you ever suffered symptoms/ailment relating to Kidney, Prostate, Hydrocele, And Urinary System?||YES/NO|
|Have you ever suffered Gastritis, Stomach or Duodenal Ulcer, Hernia, Jaundice, Fistula Piles or any other disease or disorders of the Gastrointestinal System?||YES/NO|
|Have you ever suffered Thyroid disorder or any other disease or disorder of the Endocrine system?||YES/NO|
|Have you undergone/have been recommended to undergo Angioplasty, Bypass Surgery, Brain Surgery, Heart Valve Surgery, Aorta Surgery or Organ Transplant?||YES/NO|
|Have you ever suffered Diabetes/ High Blood Sugar?||YES/NO|
|Have you ever suffered High/Low Blood Pressure?||YES/NO|
|Have you ever suffered Disorders of Eye, Ear, Nose, Throat including defective sight, speech or hearing & discharge from ears?||YES/NO|
|Have you ever suffered ailments relating to Liver or reproductive System?||YES/NO|
|Have you ever suffered Symptoms/ailments relating to Brian, Depression? Mental/Psychiatric ailment, Multiple Sclerosis, Nervous System, Stroke, Paralysis, Parkinsonism or Epilepsy?||YES/NO|
|Have you ever suffered Asthma, Bronchitis, Blood spitting, Tuberculosis or other Respiratory disorders?||YES/NO|
|Have you ever suffered Anaemia, Blood or Blood related disorders?||YES/NO|
|Have you ever suffered Musculoskeletal disorders such as Arthritis, Recurrent Back Pain, Slipped disc or any other disorder of Spine, Joints, Limbs or Leprosy?||YES/NO|
|Have you ever suffered any other illness or impairment not mentioned above?||YES/NO|
|4. Employment details|
|Nature of Work|
|Length of service|
|Details of Income proof submitted|
|Whether covered under pension scheme|
|Normal retirement age|
|5. Details of Female Prospects/covered person|
|Are you Currently Pregnant?||YES/NO|
|If yes, current months of pregnancy|
|State age of first pregnancy|
|Have you ever had any abortion, miscarriage or ectopic pregnancy?||YES/NO|
|Have you undergone any gynecological investigations, internal checkups, breast checks such as mammogram or biopsy?||YES/NO|
|Have you ever consulted a doctor because of an irregularity at the breast, vagina, uterus, ovary, fallopian tubes, menstruation, birth delivery, complications during pregnancy or child delivery or a sexually transmitted disease?||YES/NO|
|6. Existing insurance|
|Name of Member (whether proposer or covered person||Details of premium being paid|
|Savings and Investment|
|Other ( to specify)|
|7. Financial details|
|Value of savings and assets|
|Details of liabilities|
|8. Pension details|
|9. Income/Expenditure –Current and projected|
|10. Affordable contribution—Current and projected|
|11. Details of Nominee/Appointee|
|Date of Birth|
|Percentage of entitlement|
|12. Insurance Plan Details (Traditional/ULIP/Pension/Health)|
Declaration of Proposer
Signature of Proposer
NEEDS OF PROSPECT
|1. Identified Life needs||Projections per annum|
|Food, shelter, clothing and other living expenses such as transportation, expenses, utilities etc.|
|Vacations and other travel expenses|
|Other commitments such as insurance premium, various contributions etc.|
|2. Identified insurance needs|
|Life Insurance (Death/Maturity)|
|Desirable Sum Assured|
|Desirable limit of coverage per annum|
|Savings and Investment Planning|
|Desirable returns per annum|
|Desirable pension per annum|
|1. Life stage||Childhood/Young unmarried/Young married/ Young married with children/married with older children/post-family or pre-retirement/retirement|
|2. Protection needs||Life & Health/Savings and Investment/Pension|
|3. Appetite for risk||Low/Medium/High|
|4. Policy recommended, including name of insurer|
|5. Details of commitment for the current and future years|
|6. Whether all risk elements and details of charges to be incurred and all other obligations have been explained|
|7. Why you think this policy is most suited for the prospect|
Note: Mention ‘in Rs.’ etc. wherever applicable
I /We hereby certify that I/we believe that the product/s recommended me/us above is suitable for the prospect, based on the information submitted by him/her, as recorded above.
(Signature of Agent/Broker Prospect’s
The above recommendation is based on the information provided by me. I have been explained about the features of the product and believe it would be suitable for me based on my insurance needs and financial objectives.
(Signature of Prospect)
ILLUSTRATION OF A PROSPECT PRODUCT MATRIX
The table below recommends products on the basis of life stage, generic need and income segment of the customer. The needs are given a score (from 0% to 100%) on the basis of suitability of the product category to the customer’s life stage.
|Life stage||Indicative age band||Needs||Suitability index||Income segment|
|Single||Less than 30 years||Protection (Life)||75%||A1||B1||C1|
|Goal based savings for wealth creation||100%||A3||B3||C3|
|Married||31 to 35 years||Protection (Life)||100%||A6||B6||C6|
|Goal based savings for wealth creation and retirement||100%||A8||B8||C8|
|Married with children||36 to 40 years||Protection (Life)||100%||A11||B11||C11|
|Goal based savings for wealth creation, retirement, children’s education||100%||A13||B13||C13|
|Married with grownup children (Pre -retirement)||41 to 55 years||Protection (Life)||50%||A16||B16||C16|
|Goal based savings for wealth creation, retirement, children’s education||100%||A18||B18||C18|
|Retired||More than 55 years||Protection (Health)||100%||A22||B22||C22|
|Goal based savings for wealth creation||50%||A23||B23||C23|
We would expect each company to populate cells A1 to C21 with appropriate products from its portfolio. Companies may also further refine the segmentation of policyholders suggested above.
The above template would be used by the agent or intermediary to help select an appropriate product, i.e., one that meets the prospect’s needs and which is also affordable.
The agent will sign a declaration that states that he or she is recommending a particular product based on the customer’s life stage, need category and income level.
Below, we give a rationale for the suitability indices of the product categories of each customer segment, based on a simple understanding of the typical profile.
We note that health insurance would be a universal requirement among our target population, in view of the public provision of healthcare.
|Life stage (age bands)||Profile|
(less than 30 years)
| • Few dependants (parents) => some requirement for life protection |
• Financial planning for wealth creation => requirement for savings
• Medium term fund requirement for consumption => need for some liquidity in savings
(31 to 35 years)
| • Purchase of assets – house, car, etc. => need for goal-based savings |
• Savings not adequate, and there may be liabilities and dependants => life protection
• Financial planning for wealth creation, retirement => need for goal-based savings
|Married with children |
(36 to 40 years)
| • Savings not adequate, and there may be liabilities and dependants => life protection |
• Purchase of assets – house, car, etc. => need for goal-based savings
• Financial planning for wealth creation, children’s education & marriage, retirement => need for goal-based savings
|Married with grown-up children |
(41 to 55 years)
| • Significant disposable income and surplus assets => investment |
• Financial planning for wealth creation, children’s education & marriage, retirement => need for goal-based savings
• Need of some life cover, to the extent required to cover outstanding liabilities
(more than 55 years)
| • Need of steady income (pension) |
• Need to invest surplus cash with high returns and liquidity
Below, we describe the types of product that typically meet customers’ needs.
|Need||Explanation||Suitable product types|
|Protection (Life)||High life cover at an affordable rate||• Term plans|
|Protection (Health)||Medical cover for the whole family|| • Fixed benefit health plans |
• Reimbursement health plans
|Goal based savings||Create fund for long term goals – purchase of assets (wealth creation), children’s education & marriage, retirement|| • ULIPs |
• Endowment assurances
|Investment||Invest surplus money|| • Single premium plans |
• Limited premium plans
|Income||Regular income|| • Immediate annuity |
• Monthly income plans
Below we define the income segments. These should be used to determine the affordability of the insurance product.
|Segment||Annual premium (Rs. per annum) as a surrogate for Income1|
|Mass affluent||20,000 – 50,000|
The income segment table has annual premium as surrogate for income. Whilst this is one approach, we could also have annual income band for income segments. For example, mass segment could be one with annual income up to Rs 150,000; mass affluent between Rs. 150,000 and Rs. 600,000; affluent above Rs. 600,000.
• Example I (Protection (Life)) – Cell B1
Customer profile – Rahul is 28 years old, single and works for an IT company. He earns Rs. 6 lacs per annum. His father is a government employee who will retire next year and his mother a housewife. His younger sister’s marriage is next year.
Need – He financially supports his parents and sister and will also have to take care of his sister’s marriage. As a result, Rahul has tremendous financial responsibility and his demise will be a big blow to the family. So for the financial safety of his family Rahul needs life cover.
Product – A term assurance would be a suitable plan for Rahul’s need.
• Example II [Protection (Health)]
Customer profile – Ashish is 36 years old and owns a garment shop. His wife, Anita, is a home maker and they have a 2 year old daughter. Ashish earns Rs.10 lacs per annum.
Need – As Ashish is self employed and does not have any corporate health cover, he will have to bear all the expenses in case of any health emergency in his family (self, wife, daughter). In case he himself falls ill, his family might have trouble in arranging the required amount. So Ashish has to make sure that he is well prepared to take care of the medical expenses for himself and his family.
Product – A healthcare plan, either fixed benefit or reimbursement, would be a suitable product for Ashish’s need. It should cover him, his wife and daughter.
• Example III (Goal based savings for wealth creation)
Customer profile – Ram is 29 year old and works for an MNC and has an annual income of Rs. 7 lacs. He just got married last month.
Need – He plans to buy a house after 10 years and as per his estimates, he will need Rs. 20 lacs at that time.
Product – A regular premium ULIP with some mortality cover is a suitable product for Ram’s need. In case Ram dies during the term of the policy, the sum assured from his policy will provide financial security to his wife.
• Example IV (Goal based savings for retirement)
Customer profile – Arun is 32 years old and works for an MNC and has an annual income of Rs. 11 lacs. His wife is a school teacher and his son is three years old.
Need – Arun wants to retire at the age of 60 and teach slum children. But for this, he has to ensure that he has regular income post retirement.
Product – A regular premium pension ULIP would be a suitable product. In case Arun dies during the term of the policy, his wife will get the sum assured and she choose from the annuity options then available to receive regular income.
• Example V (Goal based savings for children’s education)
Customer profile – Raghav is 33 years old and works for a nationalized bank and has an annual income of Rs. 6 lacs. His wife is a home maker and his son is two years old.
Need – Raghav is well aware of the rising cost of education and knows that he will need a significant amount for his son’s graduation and post graduation. Investing in debt will not help him to generate returns which will match the rapidly rising cost of education. Also he knows that in case of his death, his wife will not be able to fund their son’s education.
Product – A ULIP with high benefits on death is a suitable product for Raghav’s need.
• Example VI (Investment)
Customer profile – Lokesh is 58 years old and has just retired from his government job. At retirement, he received a lump sum amount of Rs. 10 lacs.
Need – As Mr. Lokesh gets a regular pension, he does not need to use the amount he received during retirement. He wants to invest this amount and get good returns.
Product – A single premium investment policy is a suitable product for Lokesh’s need. In case a ULIP is chosen, the policyholder can choose a fund that matches his risk appetite.
• Example VII (Income)
Customer profile – Vivek is 58 years old and just retired from a private company. At retirement, he received a lump sum amount of Rs. 10 lacs.
Need – As Vivek will not get pension from his employer, he has to make sure that he gets regular income for rest of his life. He will also have to ensure that his wife gets regular income even after his death.
Product – An immediate annuity with spouse’s contingent annuity is a suitable product for Vivek’s need.