Insurers say proposed 1-year free-look period could lead to financial setback for industry

Life and health insurers have raised concerns over the government’s proposal to extend the Free Look Period (FLP) for private insurers from one month to one year

Life and health insurers have raised concerns over the government’s proposal to extend the free-look period (FLP) for private insurers from one month to one year, warning that it could lead to financial losses and potential misuse of policies.

A FLP of 15 days for policies purchased in person and 30 days for electronic or distance-mode purchases is already in place among public life insurers like the Life Insurance Corporation of India (LIC).

What is free-look period?

FLP is a grace period during which a policyholder can review the terms and conditions of an insurance policy and cancel it, if he finds it unsuitable.

Under the current regulations set by the Insurance Regulatory and Development Authority of India (IRDAI), the FLP is 15 days for policies purchased in person and 30 days for electronic or distance-mode purchases. If a policyholder cancels the policy within this period, he receives a refund after deducting stamp duty charges and expenses related to medical examination. This allows policyholders to cancel their insurance policy without surrender charges, if they believe it was mis-sold.

Recently, the government has suggested private insurers extend the FLP from 30 days to a year, as part of its broader initiative to curb mis-selling of policies.

However, this extension has not been implemented yet and is currently under consideration.

Why is the industry worried?

"Extending the FLP to a year for health insurance could create issues, especially if people cancel months into their policy without ever using it," said Hanut Mehta, Founder and CEO, Bimapay Finsure.

While extending the FLP to a year makes sense for life insurance, it may not be so for health insurance as the two serve very different purposes, he said.

"Life insurance is a long-term commitment, often lasting decades. So, giving policyholders more time to review their coverage and understand the terms and to ensure that it aligns with their financial goals can be beneficial. Health insurance, however, works differently," he said.

Health insurance is typically renewed every year and is meant to cover unexpected medical expenses, and since many insurers already offer partial refunds beyond the initial FLP, increasing it further may not provide much additional benefit, he said.

Instead, making policy details clearer, improving consumer education, and ensuring better guidance at the time of purchase would be more effective in helping people choose the right plan, said Mehta.

A more practical approach would be to extend the FLP for life insurance, given its long-term nature while keeping health insurance within the current framework. "This way, policyholders get the flexibility they need for big, long-term decisions without disrupting the stability of short-term insurance products," he added.

Public sector insurers, including LIC, have introduced a ‘call-back’ policy, where customers receive a follow-up call after purchase to confirm their satisfaction with the policy.

Death of policyholders, agent commissions 

Another reason why the industry is worried is that if a policyholder passes away shortly after purchasing a policy, his/her nominee would have to be given the full sum assured, creating an imbalance in the risk model, said a life insurer, on condition of anonymity. (Check sentence)

The insurer also pointed to the high commissions paid to agents, which is often around 40 percent of the premium, along with administrative and marketing expenses.

"If a policy is cancelled after nearly a year, insurers may not be able to recover these costs, leading to a negative impact on profitability," he said.

Persistency ratio concerns

Moreover, extending FLP to one year could negatively impact persistency ratios, a key metric for insurers that tracks the percentage of policyholders who maintain their policies over time.

A longer FLP increases the likelihood of policyholders cancelling within the first year, lowering first-year persistency ratios.

Additionally, agents may exploit the extended FLP to persuade customers to switch policies, leading to higher cancellations and inflated new policy sales.