You are on page 1of 2

Monday, September 27, 2010


Life insurers have tossed ethics out of the window,
and the insurance regulator seems to be looking the
other way.

In a concerted move, a number of life

insurance companies have quietly increased
the mortality charges on their unit-linked
plans (Ulips) from September 1.

The Insurance Regulatory and Development

Authority (IRDA) didn’t find anything wrong with
that and cleared a passel of new plans recently.

The move is another blow for investors in Ulips — the product that stormed the mutual fund bastion a
couple of years ago and sparked a tussle for regulatory oversight between the IRDA and capital market
watchdog Sebi earlier this year.

Earlier, the life insurers raised the entry barriers for Ulips by increasing the minimum monthly
premium on a policy to anywhere between Rs 1,500 and Rs 3,000 a month from Rs 500 to Rs 2,000
earlier. Clearly, the insurers were looking to target the well-heeled through the new Ulip plans.

But in an even more sinister move, they have raised the mortality charge, which is the cost deducted
from the premium you pay to cover the payment of death benefits.

Why to worry?

Let us suppose you have bought a policy with a sum assured of Rs 10 lakh and the total premium (or
the investment fund value in the case of a Ulip) paid till now is Rs 2 lakh. If you happen to die now, the
risk of death benefit payment on the insurer is Rs 8 lakh.

To cover this risk, the insurer deducts the mortality charge from your premium. While the mortality
premium is calculated on the sum at risk (Rs 8 lakh in our example), the premium rate is determined
by the mortality table.

Mortality measures the probability of death, and the mortality premium rate increases with the
increase in the age of the policyholder.

From September 1, the insurers have increased the mortality premium rates for each
age category steeply compared with the Ulips they sold before.

For example, the mortality charge for a 20-year old policyholder was Rs 1.122 per Rs
1,000 sum at risk in the case of Bajaj Allianz Life’s Max Gain policy. The insurer has
now more than doubled it to Rs 2.57 per Rs 1,000 sum at risk in its new Ulip Max

The insurers have a glib explanation for this move.

“We have increased the mortality charges because the minimum sum assured has now
gone up to 10 times the annual premium from five times earlier. Under our new Ulips, we
are giving both the sum assured and the fund value as death benefit. Besides, there is a built-in
accident death cover,” said a senior official with Bajaj Allianz Life Insurance Company.

However, this argument is a little woolly because almost all insurers had earlier been offering
a sum assured under their Ulip plans of as high as 20 times the annual premium.

Type II Ulips — where both the sum assured and the fund value are given on the death of the
policyholder during the policy term — have always been around and nobody used this as an excuse to
raise the mortality charge. For example, SBI Life’s Unit Plus Elite II didn’t slap differential mortality

The insurers’ argument can also be easily demolished. If the sum at risk goes up at any given
point of time, the mortality premium, calculated at a given rate, automatically goes up.
So why tweak the rate?

“The mortality premium rates can vary if the underwriting conditions change or if the insurer
experiences a high claim ratio in a particular product,” said G.N. Agarwal, chief actuary of Future
Generali Life Insurance Company.

“We have also noticed some companies increasing their mortality charges. This should
not have happened. It isn’t proper,” said Agarwal, who formerly was an actuary with the
Life Insurance Corporation of India. “I don’t understand how the regulator approved
these products without seeking clarifications from the insurers.”

S.B. Mathur, secretary-general of the Life Insurance Council, the lobbying body of life
insurance companies in the country, said he was not aware of this development. But he
added, “This should not have happened. I am not aware of this. So, I cannot make
further comments. I’ll take a look at it.”

Sinister purpose

In its revised circular issued in August 2009 that capped charges relating to Ulips, the
insurance regulator excluded mortality charges from the overall cap on expenses while
determining the investment returns of policyholders.

The first circular in July 2009 had, however, included mortality charges within the
overall cap on expenses.

After August 2009, insurers such as SBI Life increased the mortality charges while
reducing its premium allocation and other charges.

“After the new regulations came into place from September 1, insurers have been
increasing their mortality charges to make profits which otherwise would have
suffered,” Agarwal explained.

What the insurer doesn’t tell you is that profits earned from the investment of mortality
premium accrue to the shareholders of the insurance company and not to its

Therefore, an increase in mortality charges imply more investible fund for an insurance
company and, hence, greater distributable profits to shareholders. “This could be another
reason why insurers are raising their mortality charges,” admits Agarwal.

Source: The Telegraph