The insurance regulator has directed the general insurers to withdraw the automatic extension in period clause which is offered as an add-on with annual policy covers by general insurers as this violates the rules of All India Fire Tariff and is non-compliant with the guidelines on product filing procedures for general insurance products.

Insurance Regulatory and Development Authority of India (Irdai) has observed that some insurers are offering ‘Automatic Extension of Period Clause’ as an add-on to annual policies such as Standard Fire Special Perils, Industrial All Risks, Office Package, Home Package, Shop Package.

The regulator, however, has allowed the existing policies to remain in force which have been issued under the same clause until their expiry.

An automatic extension period clause allows the policyholders to extend the base policy cover by a specified period and the insurer charges a pro-rata premium (premium taken only for the period that the policyholder is looking to extend its cover) for that extended period. But the terms, conditions and exclusions for an add-on cover is same as the base cover.

According to Irdai, a base annual policy provides coverage for 365 days and general insurance products that have a coverage period of more than a year are specified as long term products.

Industry experts believe the concern is that if insurers offer extension to the annual policies then it will be treated as long term products but what has been approved by the regulator is an annual policy.

Sanjay Datta, chief - underwriting & claims at ICICI Lombard said, “The proposition is that one should not put in the automatic extension clause upfront as part of the basic policy. The general way that the tariffs are designed, it does not allow these kinds of add-ons in the basic policy. And, this is not going to majorly impact the insurers and the policyholders”.

General insurance products are normally one year products. So, policyholders have to renew their covers every year and the rates keep changing every year. But some of the insurers have this clause and the policyholders with the use of this clause can renew their cover after 2-3 months of the expiry of their coverage for which they extra premiums.

Guidelines of the All India Fire Tariff states that policies which provide coverage beyond the period of 12 months cannot be issued except for dwellings. Also, Irdai guidelines state that add-ons to basic policy should not change the fundamental nature of the basic product and have to be consistent with basic principles of insurance.

But the Irdai,in this case,says that the “Automatic Extension of Period Clause “ changes the general rules and regulations of the erstwhile All India Fire Tariff and is not in compliance with guidelines on product filing procedures for general insurance products. Hence, they have asked all insurers to withdraw such policies with immediate effect.

According to Kapil Mehta, CEO of Secure Now, an insurance broking firm, “This will not have significant impact on the industry and the policyholders because most people renew on a yearly basis anyway and the number of people who subscribe to such a clause is negligible”.