Home | Current Issue | Editorial | About Us | Subscribe | Advertise
Contact Us
| Feedback
| 4Ps TEAM
| 4Ps Calendar | 4Ps Archives
Cover Story

Special Columns
Arindam Chaudhuri, Editor-in-Chief, 4Ps B&M Chief Consulting Editor's Desk
Rajita Chaudhuri
A.Sandeep Editor’s Desk
Share |
"On the distribution front, guidelines have not brought in a positive response"
Life Insurance industry is going to undergo dramatic changes both in the products and the way they are sold following the introduction of new regulations on Unit Linked Insurance Plans (ULIPís) with effect from September 1, 2010. Insurance watchdog IRDA has tightened the norms for ULIPís after winning the battle with the markets regulator SEBI over control over ULIPís. The new guidelines issued by the Insurance Regulator, IRDA for ULIPís will cause an impact on the profitability of the insurers and bring down the ULIP sales.

However, these changes are actually for the betterment of the public but come as a mixed bag as the changes made with the intention and statement that they are for the betterment of the policyholders may cost them dear too.

These ULIPs are being positioned as Long Term solutions but some people were misusing the present 3-year norm and hence ULIPs were being sold as Short Term 3 year products. Now with the changes, they are clearly defined in the 5-year plus product category.

Some of the welcome moves are the allowance of a higher sum assured, which means higher protection for policyholders. Stricter guidelines for pension products would ensure lower mis-selling as these products were being mis-sold by some unscrupulous agents. Return guarantees will benefit pension investors who are approaching retirement. But for long term investors, a guaranteed fund, primarily debt, may not make sense and they will get much higher returns if they invest in ULIP with higher equity exposure and can buy an annuity later to get regular income.

Another welcome move is the cap on surrender charges. This puts the onus on the life insurance companies to ensure that their products are pitched as long term solutions, so that the clients who intend to pay the premium for a long term are encouraged to do so. The companies which were earlier allowing a bit of mis-selling in order to rake in lapsation profits may not be able to recover their initial expenses in respect of the lapsed policy now. But will this mean a stop to mis-selling for lapsation profits. Maybe not, as most of these policies are sold by multi level marketing companies and this loophole still exists in traditional policies and they may simply shift to traditional business.

The flip side of the guidelines is that with maximum yield loss being capped to 4%, even if a long term policy is surrendered after 5 years, it will make ULIP a very attractive short term investment product. As a result, the competition for this product with mutual funds will increase and may encourage unscrupulous agents to recommend to their customers to surrender their policy and buy a new one if the market has performed well in the last few years. This will be a deterrent to long term saving which is the core of wealth creation. On the distribution front too, these guidelines have not brought in a very positive response: commissions are likely to further come down drastically after the January 1, 2010 changes, which the distribution industry is still coping with.

This will cause the distributors and agents to pitch conventional plans to long term investors, which goes against the basic principles of financial planning which state that longer the horizon, the more exposure you must have to equity. Thus, whereas based on financial planning principles, conventional plans are ideal for short and medium term investments, ULIPs with equity funds as great long-term investments may get reversed due to commission pressures.

†Also, passing on the burden to the distributors in terms of lower commissions will in turn impact the volumes and this would further increase the cost and overheads of the insurers.

In a nutshell, while the intention of the new regulations is very noble, some of the points may cause policyholders interests to be adversely affected. A little bit of relaxation in some of the norms (like defined yield loss in case of surrender) will definitely benefit the policyholders.
Share |
Home | Current Issue | Editorial | About Us | Subscribe | Advertise | Contact Us | Feedback | 4Ps TEAM | 4Ps Calendar | 4Ps Archives
4Ps Business and Marketing is also associated with :
Copyright © Planman Media Pvt. Ltd. 2004-2007 All Rights Reserved