New ULIP norms: A whole new ball game for insurance players

Insurers are gearing up for a number of changes in the way they sell ULIPs after the new norms passed by the insurance regulator

While the Insurance Regulatory and Development Authority's (IRDA) new norms for Unit-linked Insurance Plans (ULIPs) are good for consumers, private insurers are protesting that they could see the end of the product and they will sink into the red again or remain loss-making. They fear that agents would prefer to sell traditional plans since ULIPs would turn less attractive. Interestingly, some even fear that stricter rules may spell the death of ULIPs, which have been their biggest product in the past five years. Were this to happen, it would spell another important turning point in the insurance industry.

While most insurers contacted by Moneylife were guarded or positive in their public response to IRDA's new rules, some have refused to respond and claim they are still studying the implications. "On the face of it, the impact of these guidelines on customers is favourable, with lower charges, guaranteed returns, etc. In the medium to long run, these changes could seriously impact choice of investment options to customers, restrict  product design & innovation, increase new business strain and call for increased capital requirements for insurers-thus impacting the profitability of insurers," said Deepak Sood, managing director and chief executive officer, Future Generali India Life Insurance Co Ltd.

Insurers believe that IRDA's new guidelines will affect their bottom lines. The say that capping of the charge structure will restrict the product portfolio and its flexibility. "Our bottom lines will be affected negatively and gradually even our top lines. With such norms, how does IRDA expect us to protect the policyholder's money?" asked an official from Bajaj Allianz Life Insurance.

"These changes are likely to have significant impact on product mix, distribution mix and cost structures of the industry. The timeline for implementation of these changes is very aggressive," said Rajesh Sud, chief executive officer and managing director, Max New York Life Insurance.

"In line with expectations, capping of charges will impact margins adversely. With limited product differentiation, having a low and variable cost business model will be critical. This, in turn, will lead to cost-cutting across the sector, impacting distributor commissions adversely," said an analyst from Edelweiss Securities Limited. According to Edelweiss, the capping of surrender charges is being considered a bigger blow than the cap imposed on the difference between gross and net yields, as it would not only restrict the ability to generate revenue, but also raise the persistency risk borne by the insurers. 

"Secondly, the commission structure can't sustain an agent's income; (the) agency channel will suffer badly. I hope we don't land up in a situation where the product is very good but no one is willing to sell it," said Kamesh Goyal, Bajaj Allianz Life Insurance country manager and chief executive officer.

A Reliance Life Insurance official, who spoke to Moneylife on the condition of anonymity, said that the insurance companies would also now shift their focus to selling more traditional plans. In fact, during the turf war between SEBI and IRDA, where insurance companies were banned from coming up with new ULIP products, insurers started coming out with more traditional plans. He says that the plans would now look more traditional then ULIPs.

"We understand that IRDA is simultaneously coming out with treatment of discontinuance-linked insurance policies. Under these regulations, the insurer will not be able to recover the incurred expenses (particularly under large value policies) fully as the regulator has prescribed the limits of discontinuance charges not only by percentage of annualised premium, but also in absolute value," Mr Sood added.

Probably the thorniest issue for insurers is the stipulation that all pension products should guarantee a return of 4.5% to protect the lifetime savings from adverse fluctuation at the time of maturity. Insurers believe that this would not be possible for a long-term product and investments in ULIPs will now go to safer outlets like debt and securities where the yields are low.

"Because of the guarantee structure being introduced in pension plans, insurers will now play safe, as they can't invest in equities, which means the upside is lost as everything is invested in securities and debts," the official from Reliance said, adding that ULIPs will now become more of an endowment plan.

GN Agarwal, Future Generali's chief actuary feels that there will be a drastic impact on the industry. According to him, more than 50% of ULIPs will be withdrawn from insurance companies and nearly all pension plans linked with ULIPs will be withdrawn. He went on to add that insurance companies whose revenues were solely based on ULIPs would be severely affected. He added, "They (the new norms) are too restrictive and pension products will be hit a lot, it would almost be impossible for life insurers to guarantee 4.5% on a long-term insurance product."

Insurers in the past have maintained that insurance must be sold on a commission-based model and are marketed on mutual relations. Nearly 80% of ULIPs are sold in rural and semi-urban parts of India. Life India Council's secretary general SB Mathur has said in the past, "Most of these sales are relationship-based, where it is very awkward for an agent to charge his client for doing his work."

The new framework reduces agent commissions considerably as insurers would now have to ensure that they can charge their customers 4% of the annual premium paid. Agents selling ULIPs will be less motivated and they may shift to selling traditional plans like endowment plans, as commissions are higher. The commissions for selling traditional plans are still 30% to 35% in the first year; in the second and third years the commissions is 7.5%; from the fourth year onwards, the commission is 5% for a 15-year policy.

However, one must note that the move of capping charges by IRDA does comes as a surprise, especially when its chairman, J Hari Narayan, in the early weeks of June, came out in support of insurance agents and the commission given to them as he felt that it would bring about smooth functioning for the distribution of insurance, at an event in Mumbai. He had said, "With the kind of sustained activity, which an insurance agent has to undertake, the number of times he has to meet a prospect before a sale can be concluded and the kind of post-sales service that he has to provide for the insurance holder, a commission-based model is necessary. The remuneration (to agents) is not excessive; there cannot be a lower-cost method for distribution."

ULIPs are hybrid products that combine elements of investment and insurance, and have been a big investment magnet for insurance companies. According to the Life Insurance Council of India, an industry body representing 23 life insurers, of the Rs2,00,000 crore-plus life insurance premium collected in the first 11 months of 2009-10, more than Rs91,000 crore came from ULIPs.

The new guidelines have increased the lock-in period for ULIPs from three to five years mainly to ensure that they become a long-term insurance product rather than a short-term investment option. During this period, no residuary payments on lapsed, surrendered or discontinued policies will be made. Top-up on insurance premiums will now be treated as a single premium, meaning that every top-up that one makes will have to have an additional insurance cover backing it as well.

1 decade ago
These regulations should have been in place long ago.Insurance is a long term product and must be sold accordingly. Lockin period to be increased to 10 years, everyone used to pay premiums for 20-25 years on traditional plans before ULIPs came.Pre closures(not before 5 years) to be considered only in extreme cases.Quality of agents need to be improved by making the entry barrier stringent. Insurance agency must be made a full time profession and all agents must be trained for atleast 6 months before taking up agency. Subsequently they must be certified and licensed by IRDA. Also Life insurance must be made mandatory, every individual to have atleast one policy preferably traditional (term or endowment) as it also helps the family.
1 decade ago
Will this new regulation applicable on existing policies also? Or this will applicable on new policy only.
I have invested rs. 50K in Kotak smart advantage. At the time of buing policy agent told em that you can surrender ur policy after three years. Now , kotak guys are saying that if i surrender my policy then they would forfeit my first year premium as this amount goes to guaranteed return account. How can they do it?
With new regulation they can only charge 6% as penalty fees not my full premium of first year.
So, please tell me whether it'll applicable on my policy or not?
Replied to Amit comment 1 decade ago
These new regulations are prospective and not retrospective, hence applicable only to policies that will be taken from 1st september 2010.
1 decade ago
I can not understand When a product or service meets my requirement and if I can afford it why should I worry about the profits done by the manufacturrer or the distributor.
It is the fact that manufaurrer and distributor will continue offring the product and services only if they are making good profit.
Instead of making such big hue and cry about Insurance products/ insurance agents and insurance companies, why these people go and visit he families who are saved because the insurane taken by the family member who realised the need of it. Any product the seller will always highlight all the good qualities of the product but it is up to the buyer to see wether the product is suetable to hgis requirements or wether he or she really needs it. We can not stop the evil of short cut gainers but we can keep them under control if we take the courage to expose them and penalise them.
Keshav B Bhat
1 decade ago
I think the new norms for ULIPs are for wealthy investors and for the Insurance companies not for small investors and customers niether for Agents cummunity.
Only for Insurance companies.
No perimum charges are cut down in new ULIPs norms.
Mutual Funds Adviser.
Mob. 9817040604.
bayyaram manohar
1 decade ago
Life Insurance is pushed to the innocent people mercilessly, by their own acquaintances and often comes in the way of wealth creation. This can be stopped only by reducing the commissions to the agents and spending the more on educating the importance of pure life insurance. Insurance delinked with Investments gives good returns to the investors.
Anil D Kale
1 decade ago
I hope the last word on ULIP drama is still to come as there are lot of unanswered questions,one of it being the surrender value in case of premature stopping of premium or premium holiday for which addln charges are applied.

Soon there should also be a fund ratting available,on the lines of how it is available for mutual funds on valueresearch.
1 decade ago
Ajay Ahuja
1 decade ago
While the new rules have protected the Consumers in general, they have also taken away the bread & butter from the Financial Advisor, after SEBI's guidelines of no up-front commission to Advisors form the MF AMC's, the Financial Advisors have no other alternative but to starve themselves.
1 decade ago
I am quite surprised to know that there is illiteracy on insurance to this extent, even amongst some of the knowledgeable readers of a magazine like this!!!

This has to do with the post Deepak Rao has written and the way he has analyzed the issues. Assuming someone actually buys insurance based on the ideas given by him, the family is bound to be doomed.

Here are are the reasons:

The very first premise that insurance is not an investment is wrong. From what I have come across, there are two financial products in which an average Indian invests regularly over a long period of time. One is provident fund, because he has no choice. Two is an insurance plan from LIC. All other investments like mutual funds, gold, equities etc are done more on an ad hoc basis than as a planned investment decision. There may be a few who do things differently, but they are more of exceptions than rule.

We all have financial dependents on us. Even if both the spouses are working, they are still dependent on the income of the partner since there would be several financial liabilities taken based on the total income of the two. Therefore having an insurance cover is of utmost importance.

Having established the need for a life cover, the next question is the adequacy of this cover. The argument put forward by Deepak is quite shallow. Here is why.

Before going into the other details a quick pointer. As Deepak had pointed out, the cost of making a call might have come down. The cost of airfare might have come down. But at the same time, the cost of ESSENTIAL commodities has gone up substantially high. This is precisely what Mr.Sainath, a journalist from The Hindu was talking a few days ago. The cost of the luxuries which the middle class India wanted a few years back has come down substantially. However the cost of essentials like rice, wheat, vegetables etc has gone up from a minimum of 100% to as high as 400% or 500%. I can live without making that all important call from Mumbai to Mangalore. But can my family survive without the essentials?? Twelve years ago, the cost of a liter of diesel was something like Rs.15. Today it is hovering around Rs.45. And this will continue to raise in the future. Will this not have a direct effect on the cost of other commodities??

Coming back to the family he had talked about. A family of four, with two very young children, is spending about Rs.25,000/- today. And the main breadwinner dies. The family has Rs.43 lakhs with which it will get this Rs.25,000 to sustain even in the absence of the breadwinner. Several questions arise.

1. What if the interest rates come down by a couple of percentage points? This is not impossible. During the 90’s the bank FDs had an average rate of interest of 12%-15%. It is now in the range of 8% - 10%. Can it drop further? We don’t know.
2. Will the inflation remain the same throughout? What happens if, let us say the price of one kilo of rice shoots up to Rs.100?? It was about Rs.15 a few years back. Now it is at about Rs.30. Can it go up even further? We don’t know.
3. Will the two young children never go to school? Or to college? What about their educational expenses? Can the family meet this out of the Rs.25,000 they have budgeted for their living expenses?
4. Will this family never fall sick? Never get any illness? What if there is any and the cost of medication is very high? Will they still be able to manage within Rs.25,000/-?
5. We are assuming that this family has a house of its own. If not, what about the increase in the rent every year? I am sure no landlord is magnanimous enough to give his house on rent without any hike in the rentals, right?

When there are so much of uncertainties in life, are we courageous enough to say that we should have only so much of life insurance cover which will meet our family’s immediate financial needs without looking into a considerable time in future?

In my personal opinion, this whole debate of insurance – whether it is ULIP or any other form of insurance – stems from our perception that we are making an agent/advisor rich from our hard earned money!!! Should this be the guiding force for us to decide on the quantum of cover we should have???
Deepak K Rao
1 decade ago

No insurance in the world is more wrongly sold than life insurance. We will discuss about whether you require it or not, later. First, let us have some ideas on insurance which are based upon the advice of some of the world's best writers on financial planning, insurance and investment.

Life insurance should be purchased only if required and to the extent required. A. N. Shanbhag is perhaps the best Indian writer on investment and financial planning. This is what he has to say about life insurance:

"There is no substitute for life insurance.
Life insurance is not an investment.
It is a social and commercial instrument to provide financial security in the event of death of the insured.
If dependents can look after themselves comfortably without the amount insured, life insurance is not needed.
Life insurance is like a life saving drug. If you need it, you must have it irrespective of the cost. If you do not need it and you take it, it can have very bad side effects on your financial health."

So the first question to be asked is: Do you need life insurance?

The answer is simple. You need life insurance only if you have financial dependants. If no one is going to be financially affected by your absence, you do not need life insurance.

The next question is: How much life insurance do you need?

The answer is, enough to keep your financial dependants in the lifestyle they are used to, ensure that they are debt-free, and provide for their reasonably foreseeable future needs. In other words, enough to compensate your dependents for the adverse financial situation caused by your absence.

Let us take a simple example for attempting to calculate how much life insurance a person needs. Suppose there is a family consisting of husband, wife and two very young children. Let us assume that the monthly normal expenditure of this family is Rs 25,000/-. That means a cash requirement of Rs 3 lakhs per annum, to ensure that the family lives in the lifestyle it is accustomed to.

Now supposing the husband is the sole bread winner of this family. His first concern will be that the family will not have the cash flow of Rs 3 lakhs per annum, in case he should suddenly be removed from the scene. Therefore, he must calculate what size of corpus must be invested in a safe avenue of investment like a bank fixed deposit, to ensure that the family gets Rs 3 lakhs per annum. If a corpus of Rs 43 lakhs is invested in a safe avenue like a bank fixed deposit at an average rate of interest of say 7% p.a., it will provide the family with the required income stream.

However, this does not mean that the husband must rush out and straightaway purchase Rs 43 lakhs worth of insurance. There are some deductions to be made from this corpus. For example, he may already be having financial savings of say Rs 10 lakhs. His wife may have financial resources of her own of another Rs 15 lakhs. Let us say that the value of his retirement benefits, existing insurance policies and other cash flows that will accrue in case of his death amount to another Rs 5 lakhs. This total of Rs 30 lakhs must be deducted from the Rs 43 lakhs corpus envisaged earlier, since it will be available to provide the necessary income stream.

Therefore, there is an uninsured gap of Rs 13 lakhs, that is 43 lakhs minus Rs 30 lakhs. This is the amount for which life insurance must be taken. We have of course given a very simple example, assuming that this family has already taken care of its housing requirements. You can discuss with your close family members and calculate your own insurance requirements.

Going back to the example under consideration, if when doing your calculations, you find that your total liquid assets are say Rs 45 lakhs, that is more than the corpus of Rs 43 lakhs that would be required to provide income to take care of normal expenditure, then you do not have an uninsured gap and you certainly do not require life insurance.

One final point. Do not be fooled by advisors who do complicated calculations to arrive at how much life insurance you need. They will add things like child education, marriage expenses, etc., to inflate the quantum of insurance to be taken. No one can predict the future, especially the distant future. The period of vulnerability is one, two, three or a maximum of five years after a death occurs in a family, especially of a breadwinner or important earning member. Human beings are very resilient by nature and are capable of adjusting to, and dealing with, new, adverse situations, in the medium to long term. It is in the short-term that they are vulnerable and need the protection of life insurance.

When we talk about expenses based on which to calculate life insurance needs, we generally talk about normal current monthly expenses. There is however definitely no harm in a slight increase in the estimate of these normal expenses. For example, if we are talking about Rs 25,000/-worth of normal monthly expenses, you certainly can provide for Rs 30,000/- normal expenses for the purpose of life insurance requirement calculations.

However, there is no need to substantially inflate these figures or worry about providing for 10 or 20 years hence. No one can predict the future including what shape general circumstances or economic circumstances including inflation is going to take. The two simple examples are; Twelve years ago, the cost of a telephone call from Mangalore to Bombay was more than 26 rupees per minute. If anyone had predicted that the cost of this call would come down to less than Rs 2.40 per minute, he would have been laughed at and dismissed as a madman. Similarly, if someone had predicted that one day, you would have air tickets of Re 1/- (subject of course to conditions) available in India, no one would have believed the prediction.

There is already a built-in safeguard in taking only normal monthly expenses for insurance calculations. In practical terms, we have observed that the expenses of a family tend to go down immediately after the death of one of its members. This is because expenses that used to be incurred on that particular person are no longer incurred.

Further, as mentioned earlier, it is impossible to predict future inflation rates and future fund requirements. So long as the rest of the family is adequately insured for health, and to the extent required for life, the best you can do in life insurance is enable a corpus to take care of normal expenses for the next few years, say a maximum of 5 or 6 years.

It is important and most people do not realise it when they buy insurance: Human beings are extremely resilient. They tend to adjust sooner rather than later to new situations, including existing, adverse situations. The greatest period of vulnerability is generally not more than, one, two or at the most three years from the date of death of the breadwinner.

The final point for consideration is, what kind of life insurance to take?

There is only one type of life insurance that is truly beneficial for the person buying it, and that is pure term insurance. This type of insurance is sometimes also called pure insurance or term insurance. Term insurance provides compensation in case the risk, against which protection is sought, actually occurs. There is no mixing up with investment. Term insurance is extremely economical.

Going back to our example, in case there is an uninsured gap of Rs 13 lakhs and you go to an adviosor, he will actively discourage you from taking term insurance saying that you get nothing back for all the premiums you pay. He will not mention of course, that you will get protection from the perceived risk, which is the sole objective of term insurance.

If you take a 10-year term policy for Rs 13 lakhs, and if you are aged about 35 years, the term insurance premium may not be be more than Rs 5,000/- per year. If you survive the term of the policy, you get nothing back. No problem. Be happy you survived! If something unfortunate happens, your nominees get Rs 13 lakhs. Term insurance is that simple.

If having taken a term policy, at sometime in the future, you decide that you no longer need insurance; all you have to do is stop paying the next premium. This brings another important point. Life insurance should be taken when there is a need for it and should be discontinued when the need for it disappears. So, life insurance requirements should be reviewed once in a while, at least once in five years.

If you have taken a housing loan, then you must take adequate mortgage insurance, which is nothing but term life insurance, which will result in the insurance company paying off the entire housing loan in case of your untimely demise. Life insurance is too important a subject to deal with lightly.

K Sudhkarance
Replied to Deepak K Rao comment 1 decade ago
your prediction on inflation is very tell me what was the price of 1kg onion yesterday and what is the price today .Inflation should be valued as per the pricing of essential commodities of the common man. Not as per understand that subsidies on petrolium products are being cut short every now and then which inturn will accelerate the inflation rate.Also term insurance will not solve the purpose if he is a tax payer because one gets tax benifits if he invest in insurance products.Again the maturity amount is non taxable unlike other investment understand the subject thorughly before making propognda.Regards
Gerard Colaco
Replied to Deepak K Rao comment 1 decade ago
Excellent points made by Deepak K Rao. The essence of insurance and its exact utility for an ordinary individual have been clearly brought out.
1 decade ago
Oh! If insurers r unable 2 assure a minima of 4.5% p.a. 2 customers, then why do they play on their field? Their cushion is all set 2 go 2 bay and that is y they are shouting! Public must ignore all insurance companies, at once!!!
sanjay pandey
1 decade ago
insuranceco's certainly do somthing in favour of his agent's. otherwise a new but very huge people's will be on road,like M.F. industri's.
so, ready to increse unemployed person's
invester's point of wiue it's too good.
1 decade ago
This was a long overdue move expected from a regulator from the point of view of investor welfare. Regulators ought to think about suitability and sustainability of the customers and not of the agents. There are and there will be new agents interested to sell good products for the customers at low commission rates. One more change in regulation will definitely go a long way in helping such agents to actually sell the better or best products amongst all the available ones, is that they should be able to sell products of all insurance companies under one agency like mutual funds. This will automatically reduct certain amount of misselling as at least the agents who want to sell the best policy will find out one and suggest to the customer rather than compulsorily selling whatever he or she is having.
Bhupesh Desai
Replied to D B DESAI comment 1 decade ago
Good One! ?
Bharat Thakkar
1 decade ago
i think ,

01.There is ignorance of customer in this new ULIP design .
02. There is no compulsory in insurance coverage, it should optional.
03. You also take minimum lock in period 6 yrs on ward .
04. Also some fix maturity amount offer on as long period as long benefits are there.
05. So, request for that not consider only insurance company in nutshell.

Bharat Thakkar
Insurance & Financial Advisor
Ahmedabad .
98253 29960
Dillip kumar swain
1 decade ago
Free Helpline
Legal Credit