Insurers Raise Concerns Over Proposed One-Year Free-Look Period, Citing Financial Risks

The insurance industry is pushing back against the government’s proposal to extend the free-look period (FLP) for private insurers from one month to one year, citing potential financial setbacks and the risk of policy misuse. While the extended FLP aims to provide greater flexibility to policyholders, insurers argue it could lead to higher cancellations, increased costs, and disruptions in the industry’s risk management framework.

Understanding the Free-Look Period in Insurance

The FLP is a grace period during which a policyholder can review an insurance policy’s terms and conditions. If they find the policy unsuitable, they can cancel it without incurring surrender charges.

Under the current Insurance Regulatory and Development Authority of India (IRDAI) guidelines, the FLP is:

• 15 days for policies purchased in person.
• 30 days for policies purchased electronically or via distance mode.

If a policy is canceled during this period, the insurer refunds the premium after deducting stamp duty and medical examination costs.

The government’s proposal to extend the FLP for private insurers from 30 days to a full year is part of broader efforts to curb mis-selling and provide policyholders with greater protection. However, the extension is still under discussion and has not yet been implemented.

Why Insurers Are Concerned About a One-Year Free-Look Period

1. Financial Setbacks and Risk Model Disruptions

Industry experts warn that a one-year FLP could lead to significant financial losses for insurers, especially if policyholders cancel their policies after several months.

“If a policyholder passes away shortly after purchasing a life insurance policy, the nominee will still be entitled to the full sum assured. This creates a risk imbalance for insurers,” said an executive at a leading life insurance company.

2. High Distribution and Administrative Costs

Insurance companies invest heavily in acquiring customers, including:

• Agent commissions, which can be as high as 40% of the premium in the first year.
• Administrative and marketing expenses to promote policies and onboard customers.

“If a policy is canceled after nearly a year, insurers may not be able to recover these costs, leading to a direct hit on profitability,” the executive added.

3. Impact on Health Insurance Policies

Industry leaders believe a one-year FLP may be suitable for life insurance but impractical for health insurance.

“Life insurance is a long-term financial commitment, so a longer review period makes sense. However, health insurance is an annual contract, primarily meant for covering unexpected medical expenses,” said Hanut Mehta, Founder & CEO of Bimapay Finsure.

Since health insurers already provide partial refunds beyond the initial FLP, extending it further may not provide additional benefits. Instead, Mehta suggests improving policy transparency, enhancing consumer education, and strengthening advisory services to help buyers make better decisions.

4. Lower Persistency Ratios and Policy Churn

Persistency ratio, a key metric that tracks the percentage of policyholders who continue their policies, could decline significantly with a longer FLP.

• A one-year FLP may increase policy cancellations, especially in the first year, leading to lower persistency ratios.
• Agents could take advantage of the extended FLP by encouraging policyholders to cancel and buy new policies, inflating sales numbers but destabilizing insurers’ long-term revenue.

Alternatives to a One-Year Free-Look Period

Several insurers argue that instead of a one-year FLP, a more balanced approach would be:

1. Extending the FLP for life insurance policies while keeping health insurance within the current framework.
2. Introducing call-back confirmation policies, similar to what LIC has implemented, where customers receive follow-up calls to confirm satisfaction with their policy.
3. Strengthening regulatory oversight to prevent mis-selling rather than extending the FLP across the board.

Final Thoughts

While consumer protection is essential, insurers warn that extending the free-look period to one year could have unintended financial consequences. A targeted approach, focusing on policy transparency, customer education, and regulatory oversight, may offer a better solution without jeopardizing the insurance industry’s financial health.

The government and IRDAI are expected to engage with stakeholders before making a final decision on the proposal, ensuring that the interests of both policyholders and insurers are balanced.