The article mainly focuses on the SEBI-IRDA tussle, that may lead to a much improved product if more issues are addressed. And, for almost six months, the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) have been involved in a tussle to control unit-linked insurance plans (ULIPS). Insurance regulator IRDA and capital market watchdog Sebi has reemphasised that insurers should offer assured life insurance cover with ULIPs.
However, as its initial steps, the market regulator fired the first salvo last June, when it removed entry load on all mutual fund schemes (effective from August 1). And the high cost of Ulips immediately came into focus in lest that distributors would peddle only these because of higher commissions.
INITIAL STEPS?
* Declaration of commissions being paid to distributors
* Top-ups, pension plans to have risk cover; partial withdrawals only after five
years
* Benefit illustration at 7 and 10 per cent, instead of 6 and 10 per cent
* Fund management charges capped at 1.35 (for 10-year policy), 1.25 percent (beyond 10 years)
Within a couple of months, Irda issued guidelines asking insurance companies to give benefit illustrations of net and gross yields at seven and 10 per cent for schemes up to 10 years. Earlier, they used to give this illustration at six and 10 per cent. The cost of Ulips was, effectively, cut by one per cent. It also limited fund the management charge at 1.35 per cent for a 10-year policy and 1.25 percent for polices with tenures of more than 10 years.
In the meanwhile, the insurance regulator has started tightening screws on ULIPS. A slew of measures have been introduced in the past few days to make these products more investor-friendly. The regulator is now introducing transparency that was long overdue. The initial steps are in the right direction. Also it is mandatory for the insurers to give details of the commissions being paid, from this July. And, the premium allocation charge (PAC) is also quite high for any products.
As per the new guidelines for pension plans, no withdrawals will be allowed. At maturity, a third of the maturity value can be withdrawn, whereas, rest of the money will have to be used to buy an annuity plan.
Market experts say that this could help Ulip pension schemes better than other pension plans, but with market risk. In addition, there is some tweaking with other measures. Top-up premiums would now come with a risk cover, instead of being invested entirely. Similarly, the minimum term of a Ulip will be five years and partial withdrawals will be allowed after that. But, costs, especially since these are heavily front-loaded, continue to be the main concern. Most ULIPS charge the policyholder heavily in the initial two-three years. According to a financial planner, this is too little. While it is important to make these products more transparent, it is also imperative to bring down costs.
The seven and 10 per cent benefit illustration is not realistic for a market-related product. The returns can be much more if the investor chooses to invest 100 per cent in equities.Then, there is the mortality rate. On one hand, the same insurance company sells a term policy where the mortality rate is fixed through the tenure of the product. On the other, mortality rates keep rising for Ulips every year, thereby reducing returns.
Apparently, the SEBI-IRDA controversy has resulted in a lot of changes in Ulips. But, some fundamental issues are yet to be addressed. IRDA is locked in a turf war with Sebi over control of ULIPs. The problem came to fore after the insurance regulator advised 14 insurance companies to ignore the SEBI's order banning ULIP schemes.
Both the agencies were later advised by the Finance Ministry to seek a legally binding order from a court over control of ULIPs. Meanwhile, Sebi had moved the Supreme Court to transfer all cases pertaining to ULIP issue to the apex court, following which notices were sent to the Centre, IRDA and 14 insurance companies.
