Mumbai: India’s insurance and stock market regulators are engaged in a turf war over the regulation of unit-linked insurance plans, or Ulips, insurance products that mimic mutual funds.
The Securities and Exchange Board of India (Sebi) fired the first salvo last month when it sent a show-cause notice to all life insurance companies, including state-owned Life Insurance Corp. of India, or LIC, asking them to explain why they hadn’t taken its prior approval before launching Ulips.
The Insurance Regulatory and Development Authority, or Irda, hit back on Saturday.
“Ulips, globally, are managed by insurance regulators, and under no circumstance will we let Ulips to be taken over by Sebi,” R. Kannan, a member of Irda, said in an interview.
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Sebi’s argument is that since Ulips generate a return on investment, they are similar to collective investment schemes such as mutual funds, which come under its jurisdiction. 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.
Section 11AA of the Sebi Act defines a collective investment scheme as any scheme or arrangement offered by a company under which payments made by investors are pooled and utilized to receive profit, income, produce or property, and is managed on behalf of the investors.
The Act specifies that these are schemes where investors do not have day-to-day control over management and operation. The Act, however, mentions that any scheme or arrangement being a contract of insurance, to which the Insurance Act applies, is not included under the definition of a collective investment scheme.
Irda has held several discussions with the top management of all life insurers following Sebi’s notice. Kannan said that while some life insurers had already responded to Sebi’s notice, the rest would send their replies in the next few days.
Irda’s position is that since Ulips also provide mortality benefits along with returns on investments, the product should continue to remain under the insurance regulator’s jurisdiction. “Ulips are licensed by Irda and the companies have been selling these products for the past 10 years,” said S.B. Mathur, former chairman of LIC and the present secretary of Life Insurance Council, an industry body.
“Even internationally, Ulips are sold by insurance companies and are regulated by insurance regulators,” added Mathur, who, however, declined to comment specifically on the turf battle between Irda and Sebi.
India, where the life insurance industry was opened up about a decade ago with the dismantling of LIC’s monopoly, has 23 life insurers with assets worth Rs10 trillion.
Ulips are popular among investors and for some private insurers, as much as 90% of premiums come from Ulips.
In the first nine months of the current fiscal, Ulips accounted for new business premiums worth Rs35,722 crore.
The jump in Ulip sales could be explained by the fact that most insurance agents make extra efforts to sell Ulips to get commissions that are higher than those earned from selling a conventional insurance plan, such as an endowment plan or a term assurance plan.
Ulips come in different forms—assured return, balanced and growth. In assured return plans, a majority of the premium paid is invested in fixed-income securities such as government bonds, while in a growth plan, up to 100% of the premium could be allocated to equities, depending on a policyholder’s choice.
Returns on Ulips depend on the market value of the securities in which the premium money is invested, similar to mutual funds.
Expenses and commission charges towards management of assets under Ulips are modelled on mutual funds. They are deducted from the premiums paid by policyholders. In fact, the charges deducted as agent commissions from a Ulip premium can be as high as 40%.
Although Sebi’s show-cause notice to insurers is a relatively recent development, the turf battle on Ulips has been in the making for about a year. The issue has also been discussed at a meeting of the high-level coordination committee on capital markets, of which the chiefs of both Irda and Sebi are members.
According to data from the Life Insurance Council, total new business premiums rose by 29% to Rs67,438 crore during April-December, from Rs52,215 crore in the year-ago period. The renewal premium increased from Rs79,168 crore to Rs96,917 crore, an increase of 22%.
In the case of Ulips, renewal premiums increased by 41% to Rs37,543 crore from Rs26,638 crore. The industry’s investments in equities were to the tune of Rs44,358 crore.
In recent years, life insurers have emerged as the biggest institutional investors in the equity markets. The value of equity assets under the life insurance industry was Rs4.15 trillion at the end of December. LIC alone announced plans?to??invest?at?least Rs50,000 crore in the current fiscal year.