Hemant Mishra/Mint
Hemant Mishra/Mint

Ulip sales ride on stock markets

It is advisable for both the insurer and the customer to be circumspect about Ulips

The much maligned unit-linked insurance plans (Ulips), which went through a makeover in 2010 and yet found few takers in the three years that followed, are suddenly back in favour this year. From under 30% contribution to the new business premium of the private industry, Ulips are contributing in excess of 60% for private insurers in the first half of the current fiscal (based on the data of the top seven insurers that disclose segmental revenue). For some, it’s as high as 70-80%.

Considering that these top seven private insurers account for 80% of the individual weighted received premium of the private industry (and with LIC not having Ulips for individuals), this percentage is a fair representation of the trend in the industry.

So what has made Ulips suddenly a far more compelling proposition this year, despite the fact that regulatory changes were announced in 2010? The answer is fairly obvious; with no change in product or distribution, the only thing that has changed is the external environment. The stock market is on an adrenaline rush and insurers, distributors and customers are riding this wave. Ulips are responding to the stock market like a short-term product.

The new improved avatar of Ulips was launched by life insurers in 2010 amidst great expectation that the significantly enhanced value proposition would fuel customer demand. But what followed in 2011 was contrary to this expectation. Ulip contribution came down from 83% in financial year (FY) 2010 to 29% in FY14 for private insurers, while for LIC it reduced from 39% in FY10 to almost zero in FY14. Moreover, in a declining market, not only do new inflows go down, there is also an incidence of higher lapsation. Customers end up losing valuable life cover when they lapse a policy, which is one of the core benefits of the product.

On the other hand, while a buoyant market does attract cash flows, it also drives profit booking and makes Ulips susceptible to surrenders. In the first quarter of this year, the top seven private insurers alone accounted for over 11,000 crore in surrenders. Some of the insurers that report robust new business growth rates would actually have negative net inflows if surrenders were to be factored in as their assets under management would have reduced.

Data also seems to indicate that the movement of Ulip contribution is linked with the S&P BSE Sensex, clearly underlining its volatility. Even the fluctuations in the overall business volume in response to the capital market are sharper when Ulip contribution is high. When the contribution is lower, the fluctuations are moderated.

A lot of this has to do with the reduced charge structure in Ulips, which changed the product proposition. While the regulator meant well and had the customer’s interest at heart, in reality, Ulips have gone from being high-charge products, with several penalties for exiting, to products where the customer has little or no disincentive to lapse or surrender a policy, making it amenable to being sold as a short-term investment solution.

Ulips remain susceptible to redemption pressures just like mutual funds. Thus, for an insurer, Ulips can be tricky. The reason why a Ulip driven product strategy becomes counter-productive for the insurer, and therefore for the customer, is that a product that is developed to be a long-term solution can and is sold like a short-term investment product. As investment is the main motivation behind selling Ulips, cash flows tend to be volatile.

This is not good for an insurer since it is obliged to provide stable returns to customers over the long term, but such fluctuations in the short term makes long-term optimization of investment decisions difficult. This, in turn, compromises the interest of customers who choose to stay invested. Finding the right mix of Ulips in its product portfolio can be a difficult quest for an insurer.

Ulips offer transparent structure and flexibility, but if and only if sold as a long-term product and not as a substitute for a pure investment product. The mortality charges in the product are comparable, or at least in the same ball park, as pure term products. And above all, these should be sold only to those customers who understand that with a possibility of upside lurks a risk of downside.

The problem with most of the Ulips sold today is that they go against each of these three conditions. Not only are they sold as a product that competes with mutual funds, very few Ulips have competitive mortality charges. Worst of all, they are sold indiscriminately.

In a bull run sentiment driven environment, Ulips make for an easy sale. Stock market growth is an easy pitch to ride on. This was the same pitch that was used to sell Ulips pre-2008, when short-term returns of the past were extrapolated over the long term.

Distribution of life insurance is spread across the country and involves over 2 million people. It is, therefore, difficult to control every conversation related to sale of Ulips. Being well aware of this pitfall, it is the insurers’ obligation to be especially careful that Ulips are sold as protection and long-term savings solution.

As a customer, one should answer the following questions before investing in a Ulip. Is your investment horizon greater than 10 years? Are you looking for a bundled product that gives protection as well as investment opportunities? Have you asked your agent or bank relationship manager to show you the comparison between the mortality charges in this product and a pure term plan?

If the answer to all these is yes, then buying a Ulip may be an appropriate decision for you. Ulips offer great flexibility to the customer; asset allocation can be easily changed through fund switches and premium redirection.

It is advisable for both the insurer and the customer to be circumspect about Ulips and not be carried away by the euphoria of rising capital markets. For insurers, growth driven predominantly by such products should be a cause for concern. Economic cycles do turn and mis-sold products break customer trust irrevocably. For customers, they would have only themselves to blame for not learning from their own and others’ well documented experiences.

Anup Rau, chief executive officer, Reliance Life Insurance Co. Ltd