SEBI & IRDA cross swords over ULIPs

April 14, 2010 - PRLog -- The Events:

Last week the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) crossed swords once again on the issue of regulating Unit-Linked Insurance Plans (ULIPS). SEBI restrained 14 private insurance companies from raising fresh money through ULIPs, on the contention that ULIPs are more of an investment product; which are similar in nature to mutual funds and therefore ULIPs fall under SEBI’s regulatory jurisdiction. SEBI appropriately pointed out that only 1% of the total premium goes towards insurance cover while the remaining goes towards investments. (So it wants insurance companies to take its approval before launching any ULIP and the product should be registered with SEBI). IRDA, the very next day, asked insurance companies to continue to issue ULIPs – effectively asking the insurance companies to ignore the SEBI circular.

As expected, after a couple of days the Government intervened. Both the regulators were persuaded to seek a legal mandate from the court and seek clarification on the jurisdiction issue. The Finance Minister asked for status quo ante be maintained on this issue, thus enabling insurance companies not to be hobbled from issuing ULIPs, for now. The debate on this continues even as we write this.

Personal FN presents the Facts

When one talks about “value for money”, we commonly refer to what you gain from it. Currently when an investor buys a ULIP (by issuing the cheque for the first year premium) only around 60% of the first year premium is invested. The remaining 40% goes towards making the insurance agent rich and acts as a source of revenue for insurance companies through the charges levied by them.

Today ULIPs are horrendously mis-sold. A ULIP makes more money for the insurance agent than for the  policyholder. Agents pitch their sale as “you put in your money only for 3 years (typical premium paying term in ULIPs) and thereafter you don’t need to pay premium and moreover your policy still continues”. Investors get lured by this statement and sign a cheque for the ULIP. After 3 years the same agents knocks the door of his client, now telling him that he should exit from his existing ULIP, either on the grounds of capital appreciation made or a loss suffered. This is absolutely a selling strategy adopted by the agents to fill their pockets through hefty commissions offered by insurance companies. Off-course this is also supported by the insurance companies through their frequent and unnecessary product launches. The insurance companies offer enticing commissions to agents, which is typically upto 40% (of the premium) in the first year, 7.5% in the second year and ranges between 2.5% - 4.5% from the third year onwards.

Also, most insurance companies do not disclose their portfolio on a frequent basis. They do so either quarterly or half-yearly. This makes it difficult for policyholders to judge where their money is invested and understand the quality of investments. The present regulator (IRDA) has not taken any initiative to improve transparency for policyholders.

Personal FN View

This tussle has the industry on tenterhooks.  It doesn’t really matter who continues to regulate ULIPs as long as that regulator addresses policy holders’ needs in the following form:
•   Reduced commissions (even no commissions!)
•   Transparency through better disclosure norms
•   Ethical sales practices
•   Investor education

If these issues are addressed by the regulator, irrespective of which way the legal decision goes, then ULIPs could certainly be an option for investors to consider. But, of course, this will depend upon the reason behind buying a ULIP – whether “insurance” or “investments”.

So far we at PFN have always advocated that an investor’s insurance needs and investment decisions should be dealt with separately. For insurance, one must focus only on pure term insurance policies; because when we talk about life insurance we refer to indemnifying life risk and we are not referring to making investments. Going forward if the aforementioned issues are addressed by the regulator, ULIPs might be worth looking into, as an “investment cum insurance” option. We always believe that investments should be planned through a proper financial planning exercise. Investors should diversify their investments across various asset classes such as equity, gold and fixed income securities to manage the risk and returns on the portfolio.  

Presently on the tussle between the two regulators, existing ULIP policy holders need not worry, since policies will not lapse as long as policy holders continue to pay their premiums. As long as regulation of ULIPs is carried out with the intention of offering lower cost and more transparency to the policy holders, from an investor perspective, it really wouldn’t matter who regulates ULIPs. But first the “turf war” needs to be settled!!

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