Mumbai: India’s life insurance industry transits to a new era from Wednesday, when the stage will be cleared for the debut of new-look unit-linked insurance plans (Ulips) that hold the promise of being more transparent and investor-friendly.

The Insurance Regulatory and Development Authority (Irda) has capped various Ulip charges, increased their lock-in period and mandated a minimum guarantee for such plans, which are hybrid products that combine the features of insurance and investment in equities.

Most life insurers have sought Irda’s approval for at least two new Ulips each and from Wednesday, only these products will be sold. Existing Ulips—230 of them—will not be marketed any more.

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The minimum ticket size of new Ulips could be slightly higher than the old ones, but a larger portion of the premium payment would go towards investment under the new rules, benefiting customers.

Policyholders will get most of their money back even if they exit prematurely, unlike in the old Ulip regime when charges for the early surrender of a policy could be as high as 100% of premium paid.

Customers will no longer be required to pay agent commissions of up to 40% in the first year of the policy. Such commissions may drop to around 18%.

The average agent commission in Ulips in the first year has been around 15-17% so far, but as the companies shift to the new products, the average commission payout may come down to 7-9%.

Though the new rules will benefit policyholders, reduce the first-year agent commission and help in curbing rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain Ulip sales.

A panel headed by D. Swarup, then chairman of the Pension Fund Regulatory and Development Authority, in August 2009 had recommended scrapping agent commissions on all financial products, including insurance.

Agent unions and insurance firms hated the suggestion and Irda, too, supported them, arguing that insurance was a “push" product and unless the distributors are paid sufficient commissions, the industry’s growth would be stunted.

This year’s fight between Irda and the capital market regulator Securities and Exchange Board of India (Sebi) over the supervision of Ulips changed the scene dramatically.

Irda won the fight, with the government promulgating an ordinance in June empowering the authority as the sole regulator of Ulips, but it seems to have been a pyrrhic victory that came at a huge cost to the industry.

Clean-up drive

In July, Irda tweaked Ulip charges in such a way that insurers were compelled to do away with their age-old practice of paying high upfront commissions to agents.

Lower agent commissions mean higher allocation of premium towards equities and better prospects of returns, but this will dent the insurers’ profitability. Chief executive officers (CEOs) of some insurance firms say, on condition of anonymity, that the changes may hit their margins by 40-50%.

People with knowledge of the Swarup panel’s recommendations (the report has not been made public) say most of the changes such as the capping of fees and surrender charges, and adding a health insurance or life component in pension plans were all part of the report.

“We are used to doing business in a certain regulatory framework, and when you change all the regulations overnight, it can make a significant impact," the CEO of a privately held life insurer said.

“When the regulations were tightened, we met him (Irda chairman J. Hari Narayan) to request for extending the deadline to adopt the new norms. He refused... He should have given us some more time to adopt so many changes at one go. But he argued that our industry is strong enough to adopt the changes even within the short time frame," he added.

The life insurance industry has grown about eightfold in the past decade—from a total premium income of Rs34,892.02 crore in 2000-01 to Rs2.61 trillion in 2009-10. Nearly Rs1.1 trillion of total premium came from Ulips in 2009-10.

The number of policies sold in 2009-10 was nearly 80 million, against just above 20 million in 2000-01. The total assets managed by the 23 life insurers are around Rs12 trillion, with Rs4.7 trillion in equities at the end of June.

With over 310 million policies in force, there are around three million agents. In 2001, when Ulips were launched by some private sector life insurers, there were only 900,000 insurance agents.

The freedom to choose investments coupled with an insurance cover sounded irresistible to customers, who fell prey to mis-selling. Easy regulations and the features of Ulips not only attracted hundreds of thousands of new agents, but also many foreign insurers, who entered India in partnerships with domestic firms, according to the actuarial head of a private sector life insurer.

“The typical canvassing in most of the cases is, like—invest Rs10,000 per year for three years and then you would get a whopping amount in lakhs after a few years..," K. Nagaraja Rao, state operations manager (Karnataka) at Bajaj Allianz Life Insurance Co. Ltd, wrote in the Irda journal of November 2009.

Need-based selling

The regulator introduced the concept of need-based selling this July and directed insurance firms to monitor their agents closely.

The agents are now required to submit a report on the detailed lifestyle of buyers of insurance policies, which will include their travel plans, expenses on food and so on. They will be required to disclose their commissions.

A concept called “treating customers fairly" has been there in the industry since 2000, but was never practised seriously. Now, the regulator has set up a dedicated call centre to address customers’ complaints and offer clarity on complex policies.

These changes have affirmed one critical fact: that even Ulips are insurance products at the core and not just investment instruments such as mutual funds.

“(Life) Insurance was being sold as a tax planning device some time ago, it is being sold as an investment option now and some day, we hope (life) insurance will be sold as insurance," a concluding line in the Irda journal of May 2009 said.

Possibly the day has arrived with the recent changes. “Irda has now clarified that Ulips are long term savings-cum-protection products and not short-term investment vehicles," said the CEO of the private company quoted above.

Even Swarup is impressed with the developments. “Good to see some long overdue changes being made by Irda," he said.

“However, things will not improve substantially unless the existing business model is replaced by a transparent commission-free and fee-based system like the one adopted by mutual funds and national pension scheme," he added.