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.
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."
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