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How the Sebi-Irda war affects your money

How the Sebi-Irda war affects your money
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First Published: Tue, Apr 13 2010. 12 30 AM IST

Updated: Tue, May 11 2010. 12 14 PM IST
Last week, the fight between two regulators, Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda), took an ugly turn when Sebi banned 14 insurance firms from selling or advertising unit-linked insurance plans (Ulips) through quasi judicial powers vested in the capital markets regulator. Refuting the ban, the insurance regulator waved a green signal to the companies, asking them to continue selling.
Also See Chronology of a Battle (Graphic)
The two regulators have been at loggerheads on the issue of regulating Ulips, which are investment-cum-insurance products that deploy your money in the stock and bond markets, for some years now. With each passing phase, the war gets messier. While insurance firms continue to sell Ulips after a go-ahead by Irda, both the regulators were pushed into a room in the North Block to sort the fight out. It has been decided to take legal approval on who regulates the investment part of Ulips, until then it is business as usual and insurance companies can continue to sell Ulips.
Caught between this war are the policyholders and we bring answers for them. Whatever the result may be, your money will remain safe. Continue to stay invested in your Ulips. Such phases of intense disagreement only signal the onset of long-awaited financial reforms.
Sebi’s agenda
Ulips essentially marry two products: insurance, akin to a term plan, and investment, akin to a mutual fund (MF). While as a package, Ulips have been regulated by Irda, Sebi now wants insurers to get registered with Sebi before going ahead with further sales.
Their logic in doing so: “The attributes of Ulips launched by insurers are different from traditional insurance products and they are a combination of insurance and investment. The attributes of the investment component of Ulips launched by these entities (the 14 companies) are akin to the characteristics of MFs. The investment component of Ulips is subject to investment risks associated with the securities markets, which are entirely borne by the investors. This establishes conclusively that Ulips are a combination product and the investment component needs to be registered with and regulated by Sebi,” says the 9 April notification.
While this may seem like a turf war as of now, moving ahead, joint regulation will place India at par with global best practices, besides bringing uniformity in the way financial products are priced and sold. Says Veer Sardesai, chief executive, Sardesai Finance, a Pune-based financial planning company: “Ulips have not been regulated the way they should be. Very little premium goes toward insurance charges and, hence, Sebi has a point when it says that it wants to regulate the investment side. Irda has done little to control mis-selling among insurance products and if Sebi steps in and addresses the issue, it is just fine.”
The MF industry, which bears the brunt of a strong distribution network of the insurance industry fuelled by huge commissions, moved to a no-load structure in August. In response to Sebi’s notification in this regard, Irda capped the charges on Ulips in a way that the overall charge structure could not bring down the gross yield by more than 225 basis points for a tenor of at least 10 years. But capping does not address the issue of huge commissions—up to 40% of your premium in the first year. The industry estimates the average commission to be around 18%, which would mean Rs18,000 out of an investment of Rs1 lakh is lost. This, against zero commission in a MF, is a huge incentive for agents to push Ulips.
By bringing Ulips under its purview, Sebi seeks to do away with the anomaly in distribution and address the issue of mis-selling. Says Sanket Kawatkar, head (risk and consulting services), Towers Watson, a consulting firm: “There will be no problems if life insurers are allowed to invest in MFs. For MFs, this would mean getting retail money and for a life insurer it would mean borrowing the expertise of the MF industry.”
Irda’s view
Sebi’s move has not gone down well with Irda, which is determined to regulate both the insurance and investment parts of Ulips.
Irda chairman J. Hari Narayan says: “Ulips are solely regulated by Irda, which has clear guidelines on its distribution and investment. Ulips have been around for almost a decade now. Why has Sebi suddenly woken up to claim regulation over Ulips?”
He says: “Irda has issued (guidelines to) these companies, who were served a notice by Sebi, to continue selling. If Sebi wants to claim jurisdiction over Ulips, it first needs to sort out the matter in a competent court of law. Once their jurisdiction is established, they can issue such directives.”
For insurers, it is business as usual with Irda giving them a go ahead. Says Paresh Parsnis, principal officer and executive director, HDFC Standard Life Insurance Co. Ltd: “We believe at this point we will not be penalized since Irda has given us the authority to sell Ulips and insurance is regulated by Irda. We have not stopped the sale of our Ulips.”
HDFC Standard Life was the first company to face a notice from Sebi for its pension plans, which had a zero insurance component.
What it means for you
Although this regulatory tussle may have left you on tenterhooks, you need not worry. Your money is safe. Your policies will not lapse and even if Sebi were to regulate the investment part of the product, you would only gain in terms of lower costs and greater transparency.
Says S.B. Mathur, secretary general, Life Insurance Council: “Renewal premiums can’t be stopped as that would mean lapsation. However, this is a slow period in the industry. Sale will remain minimal for the next two to three weeks.”
Money Matters recommends that you keep your money in two baskets. Invest through a mutual fund and insure yourself through a term plan—the pure life insurance product. Also, to know how the war between the two regulators will unwind, watch this space.
Illustration by Jayachandran / Mint; Graphics by Ahmed Raza Khan / Mint
deepti.bh@livemint.com
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First Published: Tue, Apr 13 2010. 12 30 AM IST
More Topics: Ulip issue | Sebi | Irda | Ulips | HDFC Standard Life |