The Biggest Refund Order of Rs. 275 Crore Issued by IRDA to SBI

IRDA ordered SBI life to refund Rs 275 crore paid as excess commissions to the corporate intermediaries from the wrongly collected premiums collected under the “Dhanraksha Plus LPPT”, by misrepresenting the nature of the plan.
Mar 12, 2014, MUMBAI: IRDA, the insurance regulatory authority has ordered SBI life to refund Rs. 275 crore making it the biggest refund order in the history of the Indian insurance industry, a move that shall benefit over 7.5 lakh borrowers of State Bank of India Group. SBI life was earlier fined for mis-selling one of its plan named “Dhanraksha Plus LPPT”, has now been ordered to refund the money which has been accounted under the excess commissions it has paid out of premium collected under this policy.

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The people who bought the policy in question during the period of 2008-09 and 2010-11 would be the main beneficiaries of the refund order, according to which the policyholders will get 44% of the Rs 625 crore premiums that was collectively paid by them for the plan. If sources were to be believed, these were the same customers who were sold a home loan by SBI and its associate banks and the plan’s intentions would be to cover the outstanding loan amount that the customer would not be able to pay in case he/she demises.

This plan as being positioned by SBI life was meant to be a two-year paying term but the premium was collected upfront by the insurer, despite the fact that the insurer had a single premium version of the product only. According to IRDA, this positioning as a two year premium plan allowed the insurer to pay 40% of the first year premium and 7.5% of the second year premium as commission to the bank, while had the plan been a single premium version the commission would have just amounted to 2% making its high scale sales a higher commission earning machine for the insurance intermediaries who majorly surmise to SBI and some of its associated banks.

This has resulted in commitment to three major offenses on the part of the insurer:

  • Representing a skewed nature of the policy
  • Payment of the excess commission to the corporate intermediaries
  • Keeping the buyers from a better informed choice or better informed choices

Initial investigations prompted IRDA to impose a penalty of Rs. 5 lakh on the insurer, but further investigations revealed that an excess payment of 44% of one installment of the regular premium received upfront in addition to the new business premium accounted for the first year was made to the corporate intermediaries. The original order primarily announced that a sum of Rs 275 crores (approximately 44% of regular premium of Rs.625.67 crore received in advance upfront along with the First Year's premium) has to be refunded to the members/beneficiaries of the scheme under question here as the premiums collected under the same for the periods of 2008-09, 2009-10 and 2010-11 were skewed and wrongly collected.

Furthering the conclusions of the above investigations, a show-cause notice was issued against SBI life in April 2013, and the insurer was questioned as to why the directions under section 34 of the Act of refunding be not issued for refunding the referred amount which was paid as excess commissions to the members of the group (intermediaries). In June 2013, SBI life made required submissions and on December 4th it was followed by a formal hearing, after which IRDA made a decision of ordering the refund.

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