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The order of the Securities and Exchange Board of India (Sebi) banning 14 life insurers from selling unit-linked insurance product (Ulip) is a wake-up call for the Insurance Regulatory and Development Authority (Irda) to set its and that of the life insurers' house in order, say insurance officials.

Though they do not agree with the manner in which Sebi issued its ban order on Friday night asking life insurers to stop Ulip sales with immediate effect, officials of life insurance companies say something like this was needed to shake up Irda. "All is not well starting from the kind of products that are approved by Irda to the way it is sold to the policyholders, the high commissions paid to the corporate brokers/ bancassurance partners in excess of the legal stipulation," a senior official of a life insurer said on condition of anonymity.

"It is really ironical that Irda, which had asked life insurers to defy Sebi's order, is talking about policyholders' interests," he said. "The Sebi order is really a wake-up call for Irda as to the kind of products it approves (many are purely investment products), the market malpractices and also the way it approves the appointment of top management of life insurers," another senior official said.

Last July, Irda was forced to come out with a regulation for capping the charges on Ulips on the back of Sebi abolishing the entry load on mutual funds. "However, life insurers have come around the regulation by offering the benefit only to policies that are held to maturity. Considering the fact that many Ulips are unlikely to be held till maturity, policyholders will not see any improvement in their value proposition," an industry official said. Many life insurers are resorting to dubious distribution channels like multi-level marketing companies. These companies operate pyramid schemes where there are no real policyholders, said another industry official. He said the product needs to be simplified for all to understand while its cost has to be brought down.

Citing the mutual fund industry that is doing well with a minimum paid-up capital of Rs 10 crore, a life insurance expert said: "With 85-90% of the premium earned from selling Ulips, there is not much of a difference a between mutual fund and a life insurance company."

"Given this, one should wonder why life insurers are bathing in red with breaking even in near future. If only cost overruns are arrested — payment to corporate agents — then the ills of the sector will be cured." Had only Irda listened to the warnings of the Reserve Bank of India's on insurance regulation in 2001 and also the committee headed by A C Mukherjee, former chairman and managing director of New India Assurance, life insurers would not be facing the current predicament.

The RBI-appointed advisory group had indicated the possibility of life insurers engaging in mutual fund operations under the guise of life insurance by incorporating a token life cover in their schemes, and suggested that Ulips be brought under the definition of life insurance business, in letter and spirit. Citing the possibility of life insurers indulging in mutual fund operations, the Mukherjee committee too had suggested that the insurance regulator should be alive to that risk.

In fact, Sebi in its order after checking a product sold by a life insurer, had said the insurance component is mere a 2% of the premium paid and the rest of the funds are used for stock market operations. According to an industry official, the turf war would not have started if only Irda had allowed outsourcing of investment operations or given link to other investment funds.

Source: http://digital.dnaindia.com/