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No matter who regulates these financial instruments, the latest tussle has brought to fore the need to bring more transparency to the unit-linked products and make them more cost effective

Unit-linked insurance plans (ulips), a favourite among the investor community and insurance industry, have since inception gathered wrath from the other financial sector players. Infamous for doling out fat commissions to agents for marketing and promoting these products, the mutual fund industry, particularly, was unhappy, especially after the recent abolition of entry load. Since ulips are heavily skewed on investment, low on insurance and are sold like an investment product, capital market regulator Securities and Exchange Board of India, or Sebi, on Friday banned 14 life insurers from selling or launching new products. It also sent notices to eight other insurance companies.

The recent order by Sebi and counter order by the Insurance Regulatory and Development Authority, or IRDA, suggesting insurance companies to ignore the Sebi order and carry on the business as usual has intensified the regulatory tussle. Whatever the decision maybe, at the end of the day, it is the policyholder who stands to gain the most.

Background

While unit-linked insurance products have been in the market for a number of years, the regulatory tussle has come to fore just this year. The guidelines for unit-linked insurance products were issued on December 21, 2005. The regulator's intent was to ensure greater transparency and understanding of these products among the insured, especially since the investment risk is borne by the policyholder.

In the backdrop of the bull run of the equity markets between 2004 and 2007, these products were an instant hit among the investors. Due to poor financial knowledge, investors solely relied on the insurance agent's advice (who primarily works for his commission). Insurance agents projected spectacular returns and swayed conservative investor into pure equity funds - only to disappoint them later. The insurance regulator then intervened and in January 2008 issued a directive mandating companies to show benefit illustrations while selling a ulip. Companies were directed to show projection keeping in mind 6 and 10 per cent returns only. While the potential for this tool is immense, lay investors who are afraid of numbers, failed to make the best use of it and continued to invest in ulips on the hope of superficial returns projected by the agents.

"This is an old issue that has gathered steam now. It is not Sebi but the mutual fund industry that was particularly unhappy with the way ulips were sold. Sebi had brought up this issue a few years ago but nothing had really happened then," said an ex-chairman of IRDA.

In 2009, the insurance regulator started work on the disclosure norms and capping of overall charges. Last year, it had put a ceiling on the total fee that a ulip can charge from the investors. Around the same time, Sebi had completely abolished the entry load concept for mutual funds. The two moves were certainly in favour of retail investors.

Points of Contention

Although both the moves - capping of charges by IRDA and abolition of entry load by Sebi - were in favour of retail investors, lower financial literacy and over reliance on an agent's advice worked more in favour of insurance players than the investors. Over the last few months, investments in equity linked saving schemes of mutual funds have dropped drastically. On the other hand, sale of ulips have picked up. According to AMFI and IRDA data, as on December 31, 2009, mutual funds had Rs 113 crore invested in ELSS whereas insurers had almost Rs 17,900 invested in Ulips.

In financial year 2008-09, 7.03 crore ulip policies were sold and companies garnered premium of more than Rs 90,645 crore. Till February 2010, the life insurance industry had sold 16.7 lakh policies.

Investment and not insurance products. According to Sebi, the attributes of the investment component of ulips are akin to the characteristics of mutual funds that issue units to the investors and provide exit at net asset value of the underlying portfolio. A policy that offers a life cover of Rs 15 lakh for an annual premium Rs 1,50,000 for 10 years, uses just 5 per cent of the money for insurance purposes. The rest is used for investment. In most cases, only 2 per cent of the premium goes towards insurance and rest is invested. "We have always considered ulips to be a fraud that is being pulled on ordinary Indian investors. There is no doubt that IRDA and the insurance industry will fight hard to keep ulips the way they are. But there is little doubt that the investment component of ulip should be regulated like any other investment product," said Dhirendra Kumar, chief executive officer, Value Research.

"IRDA has been working for almost a decade now. If they are unable to rein in rampant mis-selling of investment products in the name of insurance, then somebody had to take a call. Sebi is correct in asking these companies to stop further sale of ulips and get the products approved by them," said Ashutosh Wakhare, a Nagpur-based financial trainer.

"Such action was long over due. Sebi, being more investor-centric, is correct in making such a move," said Ashok Batliwal, member, Advisory Committee on Mutual Funds.

Industry's view

While insurance companies are tight-lipped about the issue, the regulator has been quite vocal and issued an order on Saturday directing life insurance companies to carry on the business as usual. "Ulips, globally, are managed by insurance regulators," said R Kannan, Member (actuary), IRDA.

"Sebi has no jurisdiction over ulips. Ulips are insurance products and will be regulated by IRDA," said IRDA chairman J Hari Narayan.

Ministry's view

Though the finance ministry had earlier cleared itself from the regulatory tussle saying that the issue had to be resolved by the regulators only, it is now planning to intervene. The ministry is conducting a meeting on Monday to study the two orders. "We will study the two orders tomorrow and then take a call on what needs to be done. If need be, we might intervene," said finance secretary Ashok Chawla.

Impact

In the fight between the regulators, it is certainly the investors that stand to gain the most. "The current tussle has brought to the limelight the need to regulate these products better. Investors do not understand ulips completely. Regulators need to make these products more cost effective and transparent," said Dhirendra Kumar.

No matter who regulates these complex financial instruments, the tussle is likely to turn the tide in favour of investors.

Source: Indian Express Finance