IRDAI's plan to prohibit use of critical illness policy as collateral for loan may meet GIC's stiff resistance

There could be some negative news coming for India's general insurance sector as sources privy to the developments told CNBC-TV18 that the insurance regulator is looking at prohibiting the use of critical illness policies as collateral against housing or vehicle loans.

It's a common practice to have a life insurance or a critical illness policy as a collateral for securing a housing or a vehicle loan from various housing finance companies (HFCs) and non-banking finance companies (NBFCs). The insurance policy acts as a security for the lender as the claims from the policy can be used for repayment of the loan instalments in case the policy holder loses his life.

Critical illness policies are issued by general insurance companies and they pay the insured individual a lump sum amount if diagnosed with any of the specific illnesses on a predetermined list. Any move from Insurance Regulatory and Development Authority (IRDAI) to prohibit use of critical illness policies as collateral for securing loans may be negative for the general insurance companies selling these policies as it may impact their sales.

On the other hand, the move may be positive for life insurance companies as the policies sold by them will continue to have the advantage of being able to act a collateral for securing housing or vehicle loans. It’s this reason why the General Insurance Council (GIC) has expressed its reservation on the regulators move. Sources in the know told CNBC-TV18 that in a letter written to IRDAI chairman and accessed by CNBC-TV18, GIC has categorically stated that the move to prohibit critical illness policy to be used as collateral for loans is not in the interest of the policy holders.

According to letter written by GIC, critical illness covers are taken by people either to meet the treatment costs or to manage the life style even after diagnosis of a critical illness.

GIC's letter to IRDAI further said it's important to recognise that no sooner a diagnosis happens of a critical illness, the patient usually undergoes shock and most often cannot be in a physical or psychological position to carry out their usual earning activity. In that situation, if the person also has a major loan to repay, the worry he undergoes would be unimaginable and would expedite his impending death. On the contrary, if he has a critical illness cover of sufficient sum, it helps the person in taking care of the outstanding loan and if there is any balance, it will help him meet his day to day expenses. Concluding the letter, GIC stated that it is not a good idea to deny the benefit of critical illness cover.

On the argument of critical illness policies being used as collateral and impacting life insurance business, GIC stated that the business of life companies will not get affected in any way as institutions extending credit are not as comprehensively protected by credit linked critical Illness cover as by the life insurance covers, where death by any reason is covered.