Mumbai: After tightening the norms for unit-linked insurance plans, or Ulips, the Insurance Regulatory and Development Authority (Irda) is set to shift its focus to universal life insurance policies, fearing that the products may create another industry-wide controversy.
Irda and capital market regulator Securities and Exchange Board of India (Sebi), bitterly fought over the regulation of Ulips—a hybrid product that combines investment in equities and bonds along with an insurance component—till an ordinance settled the issue by asking Sebi to keep off Ulips.
Universal life insurance policies, like Ulips, combine investment and insurance. One part of the premium for such policies goes to buy life insurance and another gets invested in bonds or equities.
The structure of these hugely complex products are somewhat similar to Ulips even though here both the premium and the benefits are variable. Here the investors also run the risk of the policy lapsing if they are not able to pay premiums that keep rising during the tenure of the policy.
A senior Irda official told Mint that a new set of regulations will be released in the next couple of months for such policies.
“Universal life policies can be dangerous without a separate set of regulations. The customers can be exposed to very high risks unless stringent regulations are imposed on these investment-cum-insurance products,” added this person, who did not want to be identified.
Typically, the product has two elements—investment and insurance. The investment amount earns interest, but as the cost of insurance increases every year with the policyholder getting older, more money flows from the investment account to the insurance account of the policyholder.
As the policy holder gets older, more money is used for the insurance cover and less and less money gets invested. In such a situation, the premium goes up, and if the policyholder is not able to pay the higher premium to keep the policy alive, it lapses and the customer loses the money.
A few Indian life insurers launched universal life insurance policies in 2009 after Irda capped Ulip charges.
Two such policies that are being sold now are Traditional Reliance Super InvestAssure Plan by Reliance Life Insurance Co. Ltd and Secure Dreams of Max New York Life Insurance Co. Ltd.Bharti Axa Life Insurance Co. Ltd, too, has a universal life plan. About 40% of Reliance Life Insurance’s new business premium came from sales of universal life policies during the first quarter of the current fiscal ending June.
Ulips were being sold aggressively by agents as they were earning high commissions till recently. Irda has recently capped the surrender charges on these, brought in a five-year lock-in period for investors, and restricted fund management charges. This has made sales of Ulips, particularly those with annual premiums in the range of Rs5,000-15,000, unattractive for the insurance firms.
Till recently, Ulips contributed a majority of the new business premium for most of the private sector life insurers. There are 23 life insurers with Rs11 trillion assets. According to data from the Life Insurance Council, a grouping of life insurers, total premium income for the industry rose by 18% in the last fiscal to Rs2.61 trillion, and around 80% of the new business premium came from Ulips.
With Ulips turning unattractive, life insurers are rushing to Irda with applications to launch universal life policies. They need Irda’s nod for any new product they want to sell.
Sensing the inherent risks in these products, Irda has recently appointed a committee under the Institute of Actuary to study these products and recommend regulations.
“The committee has submitted its recommendations and Irda will put out the regulations for universal life products within the next two months,” the Irda official said.
“The regulations will look at bringing universal life policies under a separate set of regulations. The focus will be on parameters such as the guaranteed return component, policy management and administration charges, surrender charges, lock-in period and so on,” said another person who is familiar with the development, but who did not want to be named, considering the sensitivity of the issue.
“Given their structure, the universal life insurance policies have the potential to create a market as large as Ulips. Many firms are planning such products and as they are risky we need a separate set of regulations,” the same person added.
Universal life insurance could be attractive for Indian customers but awareness is paramount, said G.V. Nageswara Rao, MD and CEO of IDBI Fortis Life Insurance Co. Ltd.
“These products have been growing in Europe and the US where the markets are mature. There should be guidelines for these products,” he added. His firm is planning to launch universal life products by the end of this year.