Wednesday, May 19, 2010

IRDA Cracking The Whip

There is a clear upside to the fight between regulators Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Author­ity (Irda) to regulate Unit Linked Insurance Plan (Ulip) —a life insur­ance product that invests money in stocks and debt instruments. What will prove to be a game-changer for the industry, a fort­night ago Irda tightened the screws on the norms for Ulips and pension plans, while increasing the risk cover they offer. A slew of measures have been introduced to make these products more investor-friendly.

The timing of the move is significant as it came when Irda is fighting Sebi to retain its independent jurisdiction over Ulips. For a period of six months now, the two regu­lators have been involved in a tussle over the control of Ulips. Sebi has termed Ulips as investment schemes like mutual funds, and thus wanted to control them. The spat surfaced in January this year, when Sebi is­sued a notice to 14 insurance companies seeking an explanation as to why Ulips were launched without its approval and why appropriate action should not be tak­en against them.

It went on to become a full-blown war when on April 9 2010, Sebi banned 14 in­surance companies from selling Lllips. The matter has since gone to the Supreme Court which would decide who will control Ulips after heating the case from July 2010. But that has not stopped Irda from making some major changes in the rules that gov­ern Ulips.
 
Look at the changes brought in by the regulator that will kick in from July 1. In the case of Ulips, investors now cannot surrender a policy before the completion of five years. In addition, partial withdrawal on all Ulips, except pension plans, can be made only after the fifth year, which was earlier permitted after three years.
Longer commitment
The industry has welcomed this move as it is expected to prove beneficial to investors due to the nature of the product. Ulips are front-loaded products, that is, a large por­tion of the premium goes into meeting var­ious charges initially, leaving very little to be invested. So they begin to give returns only after four to five years, faking tliis into ac­count, this move of a lock-in period of five years is expected be a pro-investor move by the regulator.
Apart from this, the move is expected to give Ulips a long-term character and to curb mis-selling. As the front-loaded struc­ture implies high commissions initially. customers were often encouraged by agents to churn their products either by surrendering or making partial with­drawals. In fact, with numerous complaints coming in, Irda had recently asked insur­ance companies to disclose the commission paid to the agents.

Retirement benefits
Another change the regulator has called for is diat now, a part of the top-up premi­um (additional premium) should be used for the purchase of risk cover. Earlier, any top-up invesnnents up to 25 per cent of the annual premium were not required to have any insurance component. This is also seen to be a good move as top-ups now will have a component of insurance which will en­hance the life cover of the investor which was not the case earlier.
 
As Life Insurance Council (a body rep­resenting life insurance compamies in In­dia) Secretary General SB Matlutr said, "This move will bring in discipline which will help people to save for their retire­ment." In addition to this, if an investor surrenders the policy before maturity, he will get only one-third of the surrender value as lumpsum payment; with the re­maining he would have to buy an annuity, or a pension product.
While the advantage of this is that it helps policyholders build a large corpus, what has to be taken into account is that withdrawal will not be allowed even in the case of an emergency or exringency. Another big change brought in by Irda is the mandator,' insurance cover for pen­sion plans. 

More expensive
The flip side to this is that now the pension plans will become costlier, as there is a compulsory mortality charge which will be deducted from the premium amount, reducing the investible money. (Mortality charges for a 50 year old person will be around Rs 400 for a cover of Rs 1 lakh.) This means there will be less money left for pension.
 
These changes seem to be brought in both to address the complaints against the product (Ulips), and as an attempt to si­lence Irda's ctitics. If more such issues are addressed, the tussle between Irda and Sebi may lead to a much-improved prod­uct.

As Mathur summarised it, "Irda has said that while savings cannot he de-linked from insurance, certain products where the investment component was higher like cer­tain pension products and top-up portion of Ulips, have been tine-tuned."

Posted via email from Ranjan's posterous

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