Tuesday, March 30, 2010

Update on ULIPs in India

India: Returns increase on unit-linked plans
The Indian insurance regulator's revised cap on management expenses has pushed up returns on unit - linked insurance products (Ulips) by about one percentage point, reports the media. The ceiling has also forced insurance companies to launch new policies which conform to the lower ceiling on management expenses.

The Insurance Regulatory and Development Authority (IRDA) requires insurers to cap the difference between the gross and net returns on Ulips to a maximum of 2.25-3.00 percentage points. This would lead the net yield for investors in Ulips to increase by at least 1-1.5 percentage points on an annual basis.

For instance, one insurer deducted between 3.4 and 3.7 percentage points every year from the gross yield on some of its Ulips, towards expenses such as fund management and other charges. But this has fallen to 2.5-2.7 percentage points for new products.

To increase the overall return, several insurers have also trimmed agent commissions and marketing costs and put in other cost controls. The new norms have also led the industry to withdraw and re-launch almost the entire set of products already in the market. Insurers say that they opted to discontinue less popular products and re-launched only those which could be modified.

For policyholders of old products, some insurers offer the option of switching over to a new scheme without any additional charges. Others do not offer any option because the initial charges have already been paid.

Ranjan Varma

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Do your own Financial Health Check

YOU probably get an annual physical. Your doctor will ask about your concerns, take your blood pressure and 30 minutes later you’re out of the paper gown and off to work — maybe with a new prescription for Lipitor.

A similar annual checkup takes place in another type of practitioner’s office: financial planners. But instead of analyzing your good and bad cholesterol levels, a planner may evaluate your good debts (mortgage) and bad debts (credit card). And instead of testing your reflexes, they may look at your savings and assess your ability to respond to a financial emergency.

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Friday, March 26, 2010

Regulators Fight Over Investors Retirement Investment Decisions

The fight for investors' retirement monies has entered regulatory corridors.
Barely five days after Insurance Regulatory and Development Authority (IRDA) came out with an advertisement to create awareness for unit linked insurance plans (pen- sion), the Pension Fund Regulatory and Development Authority (PFRDA) released its own awareness campaign for New Pension System (NPS) on Wednesday.

“The Indian space has low insurance penetration and it is part of the job of the regulator to tell them (people) about the various types of products that exist,“ IRDA chairman J. Hari Narayan told Hindustan Times.

IRDA plans to continue with this awareness initiative till December.

“The campaign looks more like asking investors to go and buy ULIP (Pension),“ a Mumbai-based financial plan- ner said. “What's needed is awareness about the extreme- ly high charges the product car- ries and the manner in which it is mis-sold.“

About 70-80 per cent of the Rs 83,891 crore premium col- lected between April 2009 and February 2010 came from ULIPs, whose first-year commission can go as high as 35 per cent (Rs 35 out of Rs 100 can go to the agent selling the pol- icy, though rate are different across companies).

“We have only placed the advertisements and it is for the customers to decide whether they want to buy or not,“ anoth- er senior IRDA official said. “We will be talking about the fee structure in our next series of advertisements.“

Almost on cue, on Wednesday, the PFRDA advertisement for NPS -- the world's cheapest retirement planning product -- stressed on trans- parency, and low costs.

“We have a product (NPS) which is on a low cost model and even serves individuals who are economically disadvantaged,“ said Rani S Nair, executive direc- tor, PFRDA. “The government is supporting the product and I think it is a product that people should be aware of.“

The same day, IRDA released another advertisement for term insurance. A low-cost pure insurance product, a term plan is something that insurance companies have not been pro- moting --- less than 10 per cent of the premium collected between April 2009 and February 2010 came from term plans, according to industry sources.

Ranjan Varma

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Monday, March 22, 2010

Hang Seng Index of Hong Kong

Black Money in India

Now this is something quite interesting. Do you know that a very big source of money exists in India? It is so big that it could fund the doubling of India's power capacity without breaking into too much sweat! Alternatively, it could create India's current cement capacity six times over and still have some money left with it! We are referring to the Rs 7.5 trillion windfall that could accrue to the Government by way of tax income. Income that the Government would generate if all the 'black money' in India is declared as legitimate earnings by individuals and companies.

As per a leading daily, the size of the black economy, comprising fake and counterfeit products, smuggled and pirated goods and things like bribery could easily run into 40% of India's official GDP estimates of around Rs 62 trillion.

Thus, if all of it is taxed at around 30%, it could generate tax revenues of Rs 7.5 trillion as mentioned earlier. This could then be used by the Government to build infrastructure in the country or to expand its welfare schemes. However, what has already gone looks like gone forever as it will be very difficult to retrieve the same. But the Government could indeed try and contain the spread of black money in the future. It is believed that the implementation of goods and services tax, which will soon become a reality, will go some distance in addressing the problem. If it does indeed succeed in its objective, the long term case for India would receive further boost.
Ranjan Varma

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IRDA Promoting Insurance Companies Instead of Being A Regulator?

In the midst of its spat with SEBI over regulating ULIPs, insurance regulator IRDA on Thursday sought to hard sell unit-linked insurance policies as an alternative to regular income or pension payouts.

"If you have not already provided for regular income/ pension during your retired life, consider Unit Linked Pension Plan," Insurance Regulatory and Development Authority said. In a public notice issued today, IRDA highlighted various risks as also benefits associated with the ULIPs.

ULIPs -- one of the most common insurance plans sold by life insurers where the money collected from consumers is invested into equity and debt markets and returns are linked to the same -- has become a bone of contention between the two financial sector regulators, with both claiming authority to regulate these schemes.

Earlier this year, Securities and Exchange Board of India issued show-cause notices to various life insurance companies, asking why they did not seek its approval before offering the ULIP schemes, as they invest part of their corpus in capital market.

However, the insurance sector, including IRDA, objected strongly to this move, saying the SEBI Act, that requires the market regulator's approval for any investment schemes related to securities market, does not apply to insurance.

In its today's public notice, IRDA said money from consumers is invested in a fund of their choice such as equity, debt, liquid etc in a Unit Linked Pension Plan.

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Highest NAV Guarantee: What's the Catch?

Found the following article in DNA interesting.:
Highest NAV guaranteed!  We have been bombarded with these advertisements recently. Almost all the top insurance companies such as LIC, ICICI Pru Life, Bajaj Allianz, SBI, Tata AIG, Reliance and Birla Sunlife are offering such products.

It probably sounds like magic and to a limited extent, it actually is. To provide this kind of a guarantee, use a dynamic trading strategy known as constant proportion portfolio insurance. The model is fairly intricate and is probably understood by a limited number of statistically-oriented people who earn a living by pricing options, interest rates and risks (I cannot claim to be among them).

However, the broad contours of this strategy can be understood. Let me explain what I have understood. (Caution: Please seek professional advice before making an investment. This is a general purpose article and not meant to replace professional advise.)

The strategy would start with a base allocation of the funds between risky assets (read equity and related products) and relatively safer assets (debt market and derivative products) depending on their assumption of returns expected from a risk-less instrument as well as the amount of market price drop/ interest rate changes that they seek cover from and a host of other similar assumptions.

Depending on how the actual market prices/ interest rates perform, the portfolio is rebalanced periodically to maintain a guaranteed capital.

So, the players may havedifferent initial portfolios depending on their initial assumptions and the extent of risk of change in prices/ rates that they are willing to underwrite. I, for one, would not hazard a guess on what gross returns these funds would generate.
So should one invest in such products? Here are some things to consider:

l Like any other Ulips, the amount invested in the fund is lower than the premium paid by you due to various charges like policy allocation charges, policy admin charges, etc. These are generally stiffer in the case of such Ulips as compared to regular Ulips from the same insurance companies for similar amount of premium paid. There are also guarantee charges that the insurance companies charge over and above the other charges.

l Highest NAV guarantee does not mean return is guaranteed. It is only a capital guarantee at a point of time. Let me explain with a simple example. Say you have invested Rs 1 lakh per year for three years in such a fund:

You now have 28,079 units at an average price of Rs 10.68 on which it is guaranteed that at the end of the policy term (say 10 years) you will get Rs 3,21,505 (i.e. 28,079 units X 11.45). All this ensures is that as long as you hold these to maturity and continue paying any other premiums/ charges, you will get at least Rs 3,21,505 at maturity. Your return, of course, will vary depending on when this amount is due, even higher NAVs reached during the further guarantee period (which is normally higher than the premium paying term which is assumed to be 3 years in this example) and when such highest NAV was reached.
This is just an example to show how this is a capital-guarantee product rather than a return-guarantee product.

l The strategy is designed to guarantee capital and not guarantee returns and hence, protection is inherent in the model itself. This precludes the chances of this return being comparable to a long-term investment in equity.

l There are a host of surrounding terms and conditions, which may make this product less attractive.
For example, in one product, the guarantee is available for the investment made in the first 3 years but premiums need to be paid for 10 years with the last 7 years premium effectively being a regular ulip. In another such product, the guaranteed NAV is not available in case of a drastic fall in NAV (defined in the product and unlikely to be ever reached, but nonetheless, it detracts from the overall product positioning and its very unlikely the customers would be aware of such a provision).

To get back to the original question, should you invest in such a product?
Firstly, large investors can probably save on costs by having a portfolio manager run this scheme for them (without the guarantee of course) and the charges will be much lower.

Smaller investors need to have realistic expectations about returns (more likely to be nearer to a fixed income investment rather than an equity investment) and are committed to pay all due premiums till maturity and hold on till maturity. For smaller investors, it may be advisable to stick to ELSS mutual funds or tax-based small savings plans such as PPF or NSC.

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Monday, March 15, 2010

Before buying Insurance, compare the premium with a term policy

Selecting insurance products can be confusing. There are products like unit-linked insurance plan (Ulip) where the policyholder can choose to invest in different securities and get market-related returns. Then, there are plans that promise to return a fixed sum.

However, there have been two kinds of plans that have been popular with every person seeking insurance – endowment and money back plans. And there is a confusion that exists on the difference between the two. Here’s a primer:

Plans that return money during the policy tenure are money-back policies. These plans, usually, give a fixed percentage of the sum assured periodically. In a 15-year policy and sum assured of Rs 10 lakh cover, these plans could give 10 per cent of the sum assured on completion of three years, 15 per cent after six years and so on.

Endowment plans, on the other hand, pays the entire money only when the policy matures. This includes products that offer the entire premium back and policies that have part assured returns with bonus on policy maturity.

In insurance parlance, both of these products are part of an insurer’s traditional plans product portfolio. The oldest insurer, Life Insurance Corporation (LIC) of India, has around seven endowment products, depending on the sum assured. The public sector insurer also has six money back plans varying on the tenure and returns. All other insurance companies have at least one plan in each category.

“Endowment plans suits younger people who cannot spare much money for investments as they have other priorities. The sum assured for these plans are lower than money back as the insurer needs to pay the entire on maturity,” said an official with Bajaj Allianz Life Insurance Company. He added that these policies can be mortgaged, which increases their appeal.

Homemakers usually prefer money back policies even though it has higher premiums. Getting back an assured sum is a comforting factor.

What the insured does not realise is that companies give this money, only after deducting all their charges. These include the agent’s commission, policy administration and so on. Insurers collect the premium and invest it in securities. The investments are mostly made in debt instruments. Almost 85 per cent of the investment is made in debt instrument (50 per cent in government of India securities) and the rest can be put in equities.

However, there are cheaper plans than endowment and money back policies – term insurance plans. If a person buys a term plan, and invests the rest of the amount in a public provident fund (PPF), he can make more money than what the insurance companies offer. PPF will also give them tax advantage.

Take an example of ICICI Prudential’s Life Guard policy. The policy has three options – a person can take a term plan and pay one time premium or pay regular premiums over the policy term or can even get the premium back when it matures.

If a 30-year old is seeking Rs 10 lakh cover for 10 years, the regular premium for term plan is Rs 2,751. For the cash-back, the person would need to shell out Rs 32,195 a year. If this person buys a term plan and invests the differential amount (Rs 32,195 – Rs 2,751 = Rs 29,444) in a PPF, he will end up with more money than what the company offers

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