Chennai: In an effort to reduce the clutter and confusion and help a prospective policyholder to choose a life insurance policy that suits him, the Actuarial Society of India (ASI) has issued a guidance note on how sales illustrations are to be prepared by the insurers.

The guidance note, Version 1.00, has the statutory seal and will come into operation from 1 January 2004 onwards. With the Insurance Regulatory and Development Authority (IRDA) allowing the 'file and use' procedure for a new product, sales illustrations are being made a part of the papers that are to be filed before a product is introduced in the market.

According to the note, the sales illustrations are to be authorised by the appointed actuary and approved by the management before the same could be sent for field use. Life insurers have to review the illustration every April and remove those assumptions that are not valid any more.

According to the guidance note, illustrations referring to the past performance shall be appropriate to the product that is illustrated. A rider should also be stated in the illustration that past performance does not guarantee future performance. Similarly, the sales illustration should differentiate between the benefits that are guaranteed and those that are not. Surrender values should also be clearly stated.

With regard to the assumption of rate of return for the purpose of illustration, the Life Insurance Council has specified two rates 6 per cent and 10 per cent. However, insurers are free to use a lower rate but not a higher rate than the above.

Welcoming the move as a bold and progressive initiative, an actuary says: "The guidance note maintains a very fine balance between how much to disclose and how much is really relevant."

But he is unhappy with the 6 per cent and 10 per cent standardisation of rates of return as investment boundaries. "This creates a situation where a good-performing company and a poor-performing company are forced to show the same illustrated values."

Similarly, the note is vague on whether this applies for individual business only or also for the group business. "The note could have been clear on what maximum rates to use for different funds with difference asset allocations," he says.

He has more to say. "While the guidance note sets out the scope for unit-linked products very clearly and explicitly, I am not sure if the same principle has been applied to traditional with-profit products. In the case of traditional with-profit products, it standardises only the investment return assumption but leaves other critical assumptions to an individual actuarial judgement."