Suitability analysis in insurance

An insurance policy can be perfectly good and still be wrong for the person who bought it.

IRDAI's answer is a step the agent has to take before the sale. The agent must sell on the basis of product suitability parameters, such as the client's risk appetite and financial goals. And the agent has to be able to justify that the product suits the client.

The rule has real force for one class of product. An insurance company cannot issue an investment cum insurance policy until its agent has ensured the policy is sold after a suitability analysis.

The analysis is a set of questions. Age, income, family status, life stage, financial and family goals, investment objectives, and the insurance already held.

There is one way out, and it belongs to the client, not the agent. The agent may skip the module only with the client's written consent that they have chosen to bypass it despite the agent's recommendation.

Why the rule exists. The workbook frames section 1.8.4 as IRDAI making intermediaries such as agents and brokers more accountable and reducing instances of mis-selling.

The obligation. Agents have to ensure they sell policies based on product suitability parameters such as the risk appetite and financial goals of their clients, and have to justify product suitability before selling.

The candid admission in the same passage. The workbook records that suitability analysis has been optional for quite some time, and that as a result most agents skip this section in the proposal form. That is the practice the rule is written against.

The hard gate. Insurance companies cannot issue an investment cum insurance policy until their agents ensure the policy is sold after suitability analysis.

How suitability is established. Through a series of questions: age, income, family status, life stage, financial and family goals, investment objectives, the insurance portfolio already held, and so on. Suitability is determined on information collected at the time of sale, and the determination must be based on the prospect's risk profile, financial situation and investment objectives.

The opt-out. Agents can skip the requirement only if they obtain written consent from the policyholder stating that they have consciously chosen to bypass the suitability module despite the recommendation of their agents. So the exception is documented, client-initiated and contrary to the agent's own advice.

The benefit illustration rules that sit alongside it. In the same section, on benefit illustration, agents must clearly state what the policy is about, and agents and insurance companies may give a benefit illustration taking 4% and 8% returns into account. Agents are required to sign the benefit illustration form along with the policyholder, so that investors are not lured with attractive returns, and must clearly state which benefits are guaranteed and which are non-guaranteed.

Where it meets the adviser's own rulebook. The workbook notes that where an investment adviser is also an insurance intermediary, advising on insurance-based security or investment products, the adviser must keep the principles of risk profiling, suitability and fiduciary responsibility to the client in mind under the IA regulations as well.

The 4% and 8% rates are the workbook's; the policy figures are illustrative.

Mr Bhandari, aged 47, with an annual income of Rs 14,00,000, two children in school and an existing term cover of Rs 50,00,000, is offered a unit linked plan with an annual premium of Rs 2,00,000 for 20 years.

What the agent must do before the policy can be issued.

What the two illustration rates do. On a Rs 2,00,000 annual premium over 20 years, the gap between the 4% and the 8% projection is large, and showing both is exactly the point: it stops a single optimistic figure being presented as what the policy will deliver. The signature requirement puts the agent's name against both scenarios.

The only way to skip the analysis. If Mr Bhandari insists on buying without the module, the agent must obtain his written consent recording that he has consciously chosen to bypass suitability despite the agent's recommendation. An agent who simply leaves the section of the proposal form blank has not met the requirement, and the insurer cannot issue an investment cum insurance policy on that basis.

Chapter 1 (Basics of Insurance), section 1.8.4, Regulations for Insurance Intermediaries under IRDAI Regulations, carries the whole of this: the suitability parameters, the justification duty, the admission that the analysis has been optional and is usually skipped, the bar on issuing an investment cum insurance policy without it, the list of questions, the written-consent opt-out, and the 4% and 8% benefit illustration rule with the joint signature. Expect the 4% and 8% pair as a direct recall question, and a question on the single circumstance in which an agent may skip suitability analysis.

• 4% and 8% are the benefit illustration rates. This is the examinable number in the section, and both rates must be shown.
• The bar on issuing applies to an investment cum insurance policy. The workbook states the hard gate for that class of product.
• Only the client can waive it, and only in writing. The consent must record that the client chose to bypass the module despite the agent's recommendation. An agent cannot waive it unilaterally.
• Suitability is judged on information collected at the time of sale. Not on what the agent later learns, and not on a general assumption about the client's type.
• The agent signs the benefit illustration too. The joint signature is the point: it stops an agent presenting an 8% projection as a promise.
• Guaranteed and non-guaranteed benefits must be stated separately. A single projected maturity figure does not satisfy this.
• This is the IRDAI duty on an insurance agent. The investment adviser's own suitability obligation under the IA regulations is a separate rulebook, which the workbook says applies as well where the same person wears both hats.