MUMBAI: In a move that will benefit 7.5 lakh borrowers of State Bank of India Group, the insurance regulator has asked SBI Life to refund Rs 275 crore of premium collected from policyholders, which makes it the biggest refund order in insurance history. The life insurer, which was earlier fined for mis-selling its Dhanraksha Plus LPPT through SBI and associate banks, has now been asked to refund excess commission that it has paid out of premium collected under this policy.
The beneficiaries of this order will be those who purchased Dhanraksha Plus LPPT between 2008-09 and 2010-11. The policyholders will get 44% of the Rs 625 crore premium that they collectively paid for the cover. According to sources, these policies were sold to those who availed of home loans from SBI and its associate banks during this period. The policy was intended to cover the outstanding loan in case of death of the policyholder during the term of the loan.
In its order, the regulator said that SBI Life had positioned this plan as a two-year premium paying term but collected premium upfront from policyholders. This was despite the fact that the insurance company had a single premium version of the product. IRDA said that by positioning the scheme as a two-year premium paying plan, the insurer was able to pay 40% of the first year premium and 7.5% of the second year premium as commission to the bank. "Had the single premium version of product been offered to the policy holders, the actual commission payable would have been only 2%. Hence, it can be concluded that the large scale sale as single premium payment policy has only facilitated higher commission payments to the insurance intermediaries involved who are predominantly SBI and its associate banks," IRDA said in its order.
The regulator has said that by doing so the insurer had committed three offences: misrepresenting the nature of the policy, paying excess commission to corporate agents and not providing buyers with an informed choice. In 2012, the regulator had imposed a penalty of Rs 5 lakh on the insurance companies. However, subsequent investigations by the regulator showed that an excess payment of 44% of one instalment of the regular premium received upfront along with the New Business Premium in the first year was made to the corporate agents.
"Accordingly, an amount of Rs 275 crore (around 44% of regular premium of Rs.625.67 crore received in advance upfront along with the First Year's premium ) is considered as refundable to the members/beneficiaries of the group insurance schemes under which the premiums are wrongly collected during 2008-09, 2009-10 and 2010-11," said the order.
Following this, IRDA had issued a show-cause notice to SBI Life in April 2013, asking it why as to why the directions be not issued under Section 34 of the Act for refunding the above referred quantum of excess commission paid to the members of the group insurance policies. After hearing submissions from SBI Life on June 2013 and following a hearing on December 4, 2013, IRDA decided to issue the refund order.