Mumbai: In a bid to maintain the profitability of their lucrative unit-linked insurance plans (Ulips), life insurance companies have sent a proposal to the insurance regulator to hike the minimum premium investors will have to pay on these popular plans, a move that if allowed could make Ulips costlier by between 30% and 60% by January.
The Insurance Regulatory and Development Authority (Irda) is studying the proposal.
The move follows a July directive by Irda to cap fund management charges on Ulips at 1.35%. The insurers are required to submit their proposals for new premium and cost structures by 30 November.
Ulips are hybrid products. The premiums collected from Ulips are predominantly invested in equities and bonds, while a portion of the fund is kept aside as insurance.
In July, Irda ordered all life insurers to ensure that the difference between gross and net yields in Ulips did not exceed 300 basis points for policies of less than or equal to 10 years, and not cross 225 basis points for products with higher tenures. The regulator said that within these limits, fund management charges should not exceed 135 basis points. One basis point is one-hundredth of a percentage point.
Ulip charges include agent commission, mortality charges, fund management charges, policy or administration fees, unit allocation charges and a surrender charge. Excluding the agent commission, charges currently can add up to 2-4%. Initial expenses, mainly agent commissions, on Ulips are very high, varying between 20% and 60% of the premium.
With Irda capping this, insurers are looking for ways to keep their business profitable. To avoid the resulting increase in expenses, companies can either increase the minimum premium or trim the agent’s commission. Most life insurers, however, have opted for the first option.
Financial services firm Edelweiss had said in June: “For a typical back-loaded policy, the difference between gross and net yields to the policyholder ranges between 2.1% and 4%. This difference is likely to be higher for high-charge, front-loaded policies (4-4.5%). As per the new guidelines, insurers will have to reduce this difference to prescribed range, resulting in lower revenue generation on new business written, in turn, raising dependence on capacity utilization and persistency to generate decent profitability.”
Addressing Life Insurance Corp. of India (LIC) agents in Kolkata on Saturday, LIC chairman T.S. Vijayan had said that the state-owned insurer was planning to raise minimum premium to Rs40,000 from Rs25,000 for Ulips.
“At least a 30% increase in minimum premium can be expected in Ulips where the ticket size is low. We have five such products, but the minimum ticket sizes vary. Unless the structures are changed, small-ticket policies will not be viable. The changes will be effective January,” Vijayan said.
Other insurers said the hike in premiums could be even higher.
Amish Tripathi, national head of marketing and product management at IDBI Fortis Life Insurance Co. Ltd, said, “For the industry, it may go up from 5% to 50-60% depending on cost structure of individual companies.”
“When allocation and fund management charges are capped, expenses have to be controlled. To adjust the charges, in one of our Ulips called Maha Anand, we have proposed to double the minimum premium from Rs6,000 a year to Rs12,000 a year,” said Sanjeev Pujari, head of actuary, SBI Life Insurance Co. Ltd.
The moves are aimed at protecting the expected returns from investments in Ulips. For example, currently, if Rs100 is the premium, and if the product is expected to fetch a return of 10% over three years, the gross yield is Rs110. If the insurer deducts a 4% management charge, the investor gets Rs105.60 (net yield), which is Rs4.40, or 4%, less than the gross yield. If this difference between gross and net yields is capped at 3%, the gross yield will have to be Rs146 to maintain the charges at Rs4.40. To maintain a 10% return on investments, keeping everything else constant, the minimum premium has to be increased to Rs132.72. This amount changes as the minimum premium and other expenses vary according to companies.
“There were two products where the charges were higher than stipulated. For one such product we have increased the minimum premium from Rs15,000 to Rs18,000 a year. We are expecting an approval from Irda by early December,” said G.N. Agarwal, chief of actuary, Future Generali Life Insurance Co. Ltd.
Irda has said the cap on charges will be based on the difference between the gross return shown in benefit illustrations and the actual return that policyholders get after adjusting for all charges.
Benefit illustrations give policyholders an idea about how much they will receive after accounting all charges.
Anil Singh, head (actuarial and product development) at Bajaj Allianz Life Insurance Co. Ltd, said, “Bajaj Allianz has carried out a rejig of features in Ulip products that did not comply with the guidelines as we had several products which complied with the guidelines. We have aligned commission rate with term of the policy. We feel that these guidelines are beneficial for customers and thus would benefit the industry”
“For certain products, the minimum premium sizes have been increased by 20-30% to ensure that the returns on these products do not get affected due to the cap on charges,” said an official from a large private insurer who did not want to be named.
Debashis Sarkar, chief marketing officer at Max New York Life Insurance Co. Ltd, said, “Minimum premiums will go up by 25-30% for the Ulip products. The tenures are likely to increase and there will be some loyalty bonuses for persistent customers. These are the three broad changes I see.”
According to the Life Insurance Council, the representative body of life insurers, the industry collected total renewal premium of Rs62,991 crore during the quarter ended September, of which Rs25,950 crore came from Ulips.