Life insurance has evolved over time into an investment (savings) vehicle (for example, endowments). The savings policies retain a part of the premium to return it as maturity value. This has helped the insurance companies to sell life insurance in a very big way.
Unit-linked insurance plans (Ulips)
The considerations in these products are somewhat different than that in traditional insurance products. The investment pattern here is mandated by the policyholder and all the investment returns flow to him. There is a choice to change the investment pattern of the future premium flows as well as the existing fund through premium redirection and switching, respectively. The charges are explicit and hence transparent, unlike traditional insurance products. The investor can monitor the return earned and delivered to his policy on a day-to-day basis.
These products have become massively popular in India. But questions were raised whether these were insurance policies in the true sense. Neither were the returns generated smooth and secure nor were the investments of long-term nature. The flexibility provided by these kinds of products meant that the life cover could be kept at a very low level. This resulted in Ulips being seen as similar to mutual funds and competing with them. This led to the recent regulatory turf war between the Securities and Exchange Board of India and the Insurance Regulatory and development Authority.
Over the last few years, there have been regulations around the Ulip business aimed at establishing its long-term nature (by imposing lock-in periods) and ensuring a minimum level of life cover. The recent changes, effective 1 September, have been around the charges and surrender penalties. The minimum life cover has been enhanced and the reduction in yield as a result of charges at various durations of the policy and surrender penalties have been capped. Moreover, pension products are now required to give a return guarantee.
Implication of regulation on Ulips
With limits placed on charges, companies have struggled to cover their expenses to retain margins. The commission payable to intermediaries has been lowered at the first instance to nearly a third of their earlier levels. Expense levels of life insurance companies will be required to be brought down substantially and often painfully.
Ulips have become more customer-friendly. If transparency was the hallmark earlier, they are cheaper now in the sense that the returns earned are far less affected by the policy charges. High initial charges to cover the high distribution cost is a thing of the past, penalties applicable on early surrender have been lowered and then eliminated giving much more value to the customers.
Intermediaries would struggle to maintain their earnings levels if the sales efforts and conversion rate remain the same. The very skilled and efficient of the agents would protect their earning through higher volumes. Bancassurance would thrive as the acquisition costs are lower (access to bank’s database and walk-in customers).
Product design and sales method would be aimed at achieving higher persistency. Single premiums would become popular as they are easier to sell and the earlier commission differential has reduced. Riders would be pushed along with Ulips as they continue to be profitable to the companies and would yield good commission to the agents.
Some life companies have exited the pension space, finding it extremely tough to sustain the long-term guarantee. There could be a perceptible shift to traditional business as margins for companies and earnings for agents remain. Pure protection term products, annuity products and their variants may also find favour.
Low ticket sizes will be difficult to sustain at such low expense levels. Many Ulips would look the same as the differentiation by way of charges and sizes would go. Children plans, Ulips with guarantees and the like would be popular because of the ease in sale.
To conclude, customers would gain from lower charges. Intermediaries would learn to sell more efficiently to optimize earnings. Companies would need to lower their distribution and other costs to retain margins. The new regulation has thus become the true game changer.
Sanjeev Pujari is actuary chief, SBI Life insurance Co. Ltd.