Mumbai: Arecent proposal by the Insurance Regulatory and Development Authority (Irda) to cap surrender charges at 15% in unit-linked insurance plans (Ulips) has drawn widespread criticism from life insurance firms.
Irda is in a legal battle with the Securities and Exchange Board of India (Sebi) over the regulation of Ulips.
The firms raised their concerns at a 20 May meeting of the industry lobby, Life Insurance Council, saying the limits may lead to a significant cut in agents’ commission or force companies to hike ticket sizes again, thereby turning the business unviable.
An official close to the development told Mint that the limits could be relaxed by Irda after examining all comments received till 27 May. He did not want to be identified as he is not authorized to talk to the media.
Graphic: Naveen Kumar Saini/Mint
Irda had proposed to cap first-year surrender charges at 12.5% for Ulip policies with a term of less than 10 years and 15% for those longer than 10 years in draft regulations unveiled on 18 May. The charges were proposed to be capped at 10% and 12.5% for surrenders in the second year.
“Irda is now going overboard and getting into micromanagement of Ulips, and that also at a time when debate on Ulips is going on with Sebi,” said an industry expert present at the council meeting. “The regulator has already capped charges in January, then tightened the disclosure norms last month, and is now again capping surrender charges. If Irda keeps tightening norms so frequently, the business of Ulips itself may turn unviable.”
Ulips are insurance products that invest a part of the premium paid by investors in equity instruments, while another part accumulates as insurance.
The surrender charge is levied on a policyholder if a policy is discontinued. The policyholder is given the amount remaining in the fund account after deducting these charges. The charges currently range between 10% and 60%, varying from firm to firm and product to product. The lobby group will forward the demand by insurance firms to relax the surrender charge limit to Irda.
“Fifteen per cent is too low a limit for first-year surrender charges, for the cost of acquisition is high in the first year,” said S.B. Mathur, secretary of Life Insurance Council. “Frequent tightening of Ulip norms may send the wrong signals to the industry. We’re collecting comments and proposals of life insurers and will send it to Irda before 27 May. The limits could be relaxed to 25-30% for the first year.”
Another official said on condition of anonymity that if the proposal was implemented, it could lead to a 10-12% cut in agent commissions. At present, at least 200 Ulips are in force. Agents get commissions of 12-23% for selling such products, though the law allows commissions of up to 40% in the first year of the policy.
“If a policy lapses in the first year itself, it assumes the structure of a single-premium policy, whereby an agent gets only 2% commission,” the official added. Most company officials refused to comment as the matter is a regulatory one.
While imposing limits on surrender charges, Irda, in its proposal note, had mentioned: “It’s observed that insurers apply different surrender charges while paying the surrender value to the insured.”
The limits need to be relaxed, so that the firm can recover costs, said an official at a large private sector life insurer.
“Nearly 100 Ulips in the industry could be currently charging more than 15% as surrender charges in the first year,” he said. “Going by the current proposal, all these products will have to be repriced and refiled. We try to offer highest returns in the shortest possible term. We pay high commissions and incur huge acquisition costs in the first year of the policy.”