Policy Servicing — in Life and General Insurance

Policy Servicing — in Life and General Insurance 

The Insurance Policy Document, Policy Servicing in General Insurance and Life Insurance Business; Regulatory Guidelines 

Insurance is widely, and correctly, regarded as a long term business, one which commences with the sale of a product but is expected to develop into a strong relationship of mutual trust between the buyer and seller, that stretches long beyond the time horizon of normal financial products. Very often, the business operates true to this paradigm and is able to create durable relationships with customers. In this chapter we shall discuss the activity of policy servicing, and how it has an impact on the creation of stable relationships with customers. 

Many employees and distribution agents regard the insurance policy as an important component of the service they deliver to customers. In reality the insurance policy is the equivalent of the ‘warranty card,’ the operational manual and the ‘invoice’ which a customer gets every time he purchases something, be it a gadget, clothes, or some consumable. Providing these to a customer is necessary to establish the terms of sale, the conditions that apply, the duties and rights of each party to the transaction. Of course, the policy has a higher legal status since it is a formal contract, but it would be best to regard it functionally in the same way as these documents. 

The Insurance Policy Document

The insurance policy is the record of the ‘product specifications,’ of what has been bought and sold, the extent and limitations, and the manner in which the services can be accessed and delivered. It is valid for the ‘duration’ or ‘period of insurance, the time frame for which the insurer has assumed the risk. 

Contract Wordings: Both the Life Insurance and General Insurance policy consists of two parts. The first consists of pre-printed, standard ‘Clauses’ and ‘Conditions’ which are common for all policies issued for a particular product, and are commonly referred to as the ‘Contract,’ ‘Bond,’ ‘Wordings’ or even just as the ‘Policy.’ Add On Covers and Riders: In addition to the standard coverage offered in what we may call the ‘base’ version of the policy by borrowing a phrase from the auto industry, Insurers offer enhancements called ‘Add-Ons’ by the General Insurance Industry and ‘Riders’ by the Life Insurance Industry. These require special definition of what is being provided, and they too could either be included in main body of the first part of the Policy Document, or on separate sheets. The ‘wordings’ of the ‘Add On’ or Rider are called ‘Endorsements, a term which is also used for documents issued to make mid-term changes toa policy. 

The Schedule: The so-called second part of the policy, is called the ‘Schedule,’ and this records the individual details of each policy holder, which vary with each policy sold to a customer. 

Policy Servicing — General Insurance 

General Insurance policies are issued for a period of one year or less. There are some notable exceptions to this norm, such as policies insuring projects under construction, policies for some types of cargo in transit, and a few ‘health insurance’ or ‘dwelling insurance’ policies which are sometimes issued for slightly longer durations. However, the great majority of these policies are valid for a period of one year or less. During this period, on occasion, the circumstances of the ‘risk’ can change. Mentioned below are some of the more common types of changes that are required by policyholders: 

-Sale, Purchase or Change in Ownership: for example sale of a Motor vehicle or Building; purchase of a new vehicle to replace an old vehicle; the fitment of a new gadget or accessory to vehicle 

-Addition, Improvements, or Deletion: Additions to a _ building or plant and machinery under property insurance policies; Addition of a new member or employee to a ‘group policy, or deletion of an employee who has resigned 

- Change in Value: due to addition to the stock, building or other property 

«Change of Address for Communication, or other contact details under all types of policies 

-Correction of Description: correction of description of risk due to accidental data entry errors 

-Cancellation of Policy: due to change of ownership or cessation of risk 

In short, mid-term changes may be required for any number of reasons, and sometimes additional premium, or a processing fee, may have to be collected for this purpose. 

The policyholder is expected to make a complete declaration of the facts and requirements for change to the Insurer who collects necessary premium. To make the changes a new policy is not issued to replace the old document, but an Endorsement is issued. This is a document which records the changes being made and is treated as an addition to the policy. 

Well before the end of the policy period Insurance Companies send a ‘Renewal Notice’ to the policy holders. This is usually a letter, a reminder and invitation to the policy holder to renew the insurance. It mentions details such as the Sum Insured, Premium and the date on which the existing policy will end. While it is not a legal requirement, for obvious reasons related to retention of business and customers the Insurance Companies place great emphasis on ensuring that their Customers get Renewal Notices sufficiently in advance, and make strenuous efforts to collect the Renewal premium before a policy ‘expires.’ This ‘seamless’ renewal of insurance benefits both parties. It provides continuous protection for the policy holder and helps the insurer retain business and customer base. A gap between ‘expiry’ and ‘renewal’ could create a dangerous window during which there is no insurance protection for the asset. A high level of business retention provides a stable foundation to which addition of new customers adds incremental value in much the same way as ‘compound interest’ adds to the corpus invested with a Bank. It is also well established that the cost of ‘acquiring’ new customers is considerably higher than that of retaining existing ones. 

‘Renewal’ is a phenomenon and term associated with the General Insurance industry, and it presents the customer with an opportunity to review the quality and price of his insurance protection. Customers tend to bargain hard at the time of renewal, and Insurers do their utmost to retain them. The constant affirmation of trust and service provides the basis for a longterm relationship. 

Policy Servicing — Life Insurance 

The Paradigm for the Life Insurance Industry is totally different. Since life insurance policies are invariably issued for long-term periods they do not require ‘renewal’ (barring one solitary exotic exception). However, the industry does experience a periodic ‘activity’ and ‘moment’ when the relationship between insurer and policyholder requires reaffirmation. This happens because, though the policy contract is issued for a long duration and is not subject to renewal, but the premium has to be paid at periodic intervals, varying from ‘monthly, ‘quarterly’ , ‘six-monthly’ or ‘annually.’ The only exception is that curiosity, the ‘single premium policy, where the premium, usually a huge sum, is paid at the beginning itself, with nothing to be collected subsequently. These form a very small portion of the sales turnover for reasons discussed elsewhere. 

The periodic collection of premium presents a challenge for the Insurance company, though this is much lesser than that posed by the ‘renewal’ to its’ General Insurance counterpart. While the ‘Life’ policy holder cannot change his company, since the contract is for a long term, the Insurer must ensure that he pays premium before time, or definitely within the ‘grace period.’ In any case, if the premium is not paid when due, the policy lapses and the protection becomes inoperative. It can be ‘revived,’ but the procedure is cumbersome and most policies that lapse are not revived. This is a loss to both parties. For the policyholder a ‘lapsed’ policy is a loss of coverage and of the entire premium paid till that point. For the Insurer it is a loss of a customer and a regular cash stream.”° 

The Insured may fail to pay the premium for a variety of reasons: 

-Fortuitous: ranging from _ carelessness, inadvertence, or even plain forgetfulness - Financial Incapacity: Shortage of funds due to other financial needs -Value Mismatch: Excessive High Premium arising from over-purchase of insurance beyond economic capacity; sometimes this is also called ‘over selling’ «Product Mismatch: dissatisfaction with the product, which is usually caused by ‘Miss selling, which happens when a seller is keen to sell a product which the buyer may not actually need; unscrupulous sellers may overemphasize some features, not reveal restrictive features, may portray the product as more attractive than it is, or may simply ‘push’ the prospect with persistence anda play on ‘emotions’ 

Insurance companies try to reduce the impact of these factors through pro-active steps. They send Renewal Notices and regular Reminders through electronic media to ensure that fortuitous factors do not prevent renewal. Life Insurance policies provide the facility to pay premium in monthly, quarterly and instalments of other durations. Some types of Life Insurance policies (other than pure ‘Term’ policies) also provide the Insured with the facility to take a loan proportionate to the paid up value. To prevent value mismatch Agents, Advisors and other Intermediaries are trained to provide skilled assistance to an Insured in choosing the most suitable product and amount according to their needs and larger financial goals. Some companies also run publicity campaigns to create awareness about products, features and factors that should guide buyers in making product selection. Intermediaries are counselled and trained in customer centric behaviour to ensure that they understand the importance of providing correct and meaningful inputs to customers. Internal penalties and deterrents are also put in place to discourage distribution personnel from pushing customers into buying products they do not need but which the distributors want to sell. All of this is done with the objective of preventing miss-selling, which in the long run erodes customer confidence like little else can. Ultimately, however, miss-selling is the outcome of ethical failure on the part of both the individuals who make up the sales force and their organisations, and only a unified resolve and concerted action on the part of both can prevent it. 

Regulatory Guidelines 

Deeply conscious of the need to ensure that policyholders receive services that meet at least some minimum standards both in terms of policy servicing and payment of claims the IRDAI issued the “Protection of Policy Holders Interests Regulations” in 2002, and subsequently revised and reissued them in 2017. These regulations define the quality and timelines to be followed by all Life and Non-Life Insurers. Some of the significant guidelines for Policy Servicing are summarized below”®: 

-The Prospectus: For every product the Prospectus shall explain in simple terms the benefits, coverage, exceptions and conditions. 

*The Proposal Form: A Proposal Form, to be filled up by the Insured, must be used to record the details of the risk or property that is proposed for insurance, except in the case of Marine insurance for which such forms are traditionally not used. Wherever a Proposal form is not used, e.g. in cases of tele-underwriting, the insurer shall record the information obtained orally in writing, and confirm it within a period of 15 days. 

-The Policy: Detailed stipulation are made about details which must be mentioned such as the coverage, exclusions, conditions, period of insurance, Sum Insured, premium, etc. 

-Free Look Period (Life Policy): The insurer must inform the insured in writing at the time of forwarding the policy that the Insured has a period of 15 days after receipt of the policy document during which he may review the terms and conditions, and if not satisfied with them, he has the option to return the policy to the Insurer. In the case of Electronic policies or those obtained through ‘distance’ mode, this ‘Free look’ period is extended to 30 days. The Insured will be entitled to a full refund of premium subject only to specified deductions. 

-General Insurance Policy: In addition to the other requirement applicable to all policies mentioned above, General Insurance policies must also state action to be taken by the insured upon occurrence of a claim, the Insured’s post-loss obligation regarding the subject matter of insurance, the provision for cancellation of the policy on grounds of mis-representation, fraud, non-disclosure of material facts or non-cooperation of the insured, etc. 

What is more important than the details of the requirements is the fact that the Regulator has taken pro-active steps to protect the rights of policyholders to receive a minimum standard of service, and made defaulting insurance companies subject to strict action and penalties.