The recent spat between the insurance regulator, IRDA and the capital markets regulator SEBI

over unit-linked insurance products (ULIPs) had one clear winner — the investor.

More than 10 years after the life insurance business was opened to the private sector, the
insurance regulator has prescribed large-scale changes in unit-linked plans to make them more
transparent and customer friendly. From lower charges to better returns, the regulator stepped in
to ensure that the customers get a fair deal.

For the 23 Indian life insurance companies, however, these major changes meant reworking their
business models and revising business projections. So, from increasing their projected capital
requirements to delaying their break even, companies are gearing up to meet the challenges that
the new IRDA norms have thrown up.

ULIPs are insurance-cum-investment products. The returns on these schemes are market linked.
The perception of ULIPs more as an investment product rather than an insurance product had
prompted SEBI to exert its jurisdiction over them. However, with IRDA now mandatorily
increasing the risk-cover offered in these plans and making life cover compulsory in pension
plans, this is not the case.

The industry is now entering a new phase. The new regulatory environment may make life more
challenging for insurance companies. The market space is expected to change with new products,
and new ways of marketing them.

Capital

Private players may have to bring in more capital into the business with the new regulations
putting pressure on margins. Companies have tried to absorb some of the burden of the lower
charges onto their books and passed the remaining to their agents and distributors.

With the cap on surrender charges, companies have lost out on one of their money-making
options. Till now, more lapses in policies meant more profit for the insurer. Now companies can
only deduct their acquisition expenses before returning the funds to the policy holders.

Insurance companies are looking to bring down expenses by cutting down costs and improving
employee and agent productivity.

Some of the established players are also rationalising their branch structure by closing down non-
performing branches and retrenching employees.

Companies are focusing on selling simple products through the online channel to reduce
intermediation costs.

Profitability

Break even of many of the companies may be pushed farther. The few companies that are
already profitable may struggle to maintain their profit levels.
Change in product mix

While companies say that post the changes in the product structures, ULIPs will become more
customer-friendly, they do not expect the sales of unit-linked plans to pick up. This is because
they are not sure on how the agents and distributors are going to push ULIPs in the new scenario
of lower commissions. Because of this, most of the companies have launched only limited
ULIPs. The launch of more ULIPs will depend on the reaction of their distributors and
customers, according to them.

Most of them have also shied away from launching unit-linked pension plans. With the IRDA
asking companies to give a guaranteed return of 4.5 per cent, they feel that the customers may
lose out on higher returns as companies will invest more in debt to give the guarantee.

What companies are doing instead is shifting their focus to traditional policies. They are either
launching new traditional plans or repositioning their existing portfolio of traditional policies to
fill the void. Traditional plans may also become more attractive for agents to sell due to the
better commissions. This will lead to a change in the product mixes for these companies in
favour of traditional policies.

So from a situation where ULIPs constituted almost 80-90 per cent of the industry's sales, the
share of ULIPs could come down to 65-70 per cent in the next one year.

Minimum Premium

Companies have also more than doubled the minimum annual premium in unit-linked plans. This
is because they have to incur the same acquisition expenses irrespective of the premium size. The
increase in the minimum premium requirement may put ULIPs out of reach of small ticket
investors. The minimum premium for most of the companies is above Rs 10,000 now.

Companies see a clear shift among lower income groups towards traditional policies and expect
ULIPs to be popular only among higher income groups.

Single premium policies

Single premium policies are another way through which insurance companies are trying to keep
their distributors interested.

When an agent sells a regular premium unit-linked policy, he gets say five per cent commission
in the first year and 2.5 per cent for the subsequent years if the policy holder decides to continue
with the policy. When he sells a single premium policy, he gets a commission of five per cent
and does not have to worry about renewals. The distributor will be motivated to sell more single
premium policies and get higher commission by compensating through volumes.

For companies also, it means lesser expenses to ensure renewals.

The road ahead

Going ahead, the sector may see some of the companies coming out with public issues. The IPO
guidelines are expected to be announced in the next few months. Companies such as Reliance
Life, HDFC Standard Life, ICICI Prudential and SBI Life have evinced interest in going public.

According to industry players, the sector may also see consolidation in the coming months. The
recent changes in regulation are going to make it difficult for some of the newer players to
continue to operate.

But despite all of these changes, the Indian market continues to remain attractive to the foreign
players due to the sheer size of our population.

However, the entry of new players into the Indian market will be subject to hiking the limit of
foreign direct investment to 49 per cent.

Come a long way, but miles to go still

N. S. Vageesh

Chennai

It's a decade since the life insurance sector was opened up. From what was then a monopolistic
set-up with just Life Insurance Corporation (LIC) in operation, the playing field has changed
dramatically. There are now a total of 23 companies in operation testifying to the image of a
market with huge potential. Every top global player has entered with the hope of making it big in
the world's fifth largest insurance market.

IMPRESSIVE BIZ GROWTH

The last 10 years have witnessed robust growth in business terms. Life insurance premiums have
seen a ten-fold rise from Rs 26,250 crore in 2000 to about Rs 2,61,025 crore in 2010. Insurance
penetration measured as a percentage of gross domestic product (GDP) has grown to a shade
below five per cent from just a little over one per cent 10 years ago. Impressive as these statistics
are, there is still a long way to go for the insurance industry before it reaches a state of maturity.

LONG WAY TO GO

Think about how insurance products were sold a decade ago.

Life insurance has never been a product that buyers clamoured for. It was a product that had to
be ‘pushed', often by persistent neighbourhood friends who doubled up as agents in a second
part-time job to beef up family incomes. And that too, because their agency was in danger of
termination for want of sufficient sales performance! Not so much about whether it was relevant
for you — but because it was life-saving for the agent himself!

Then the savvier agents always marketed insurance as a tax-savings tool with the hint of some
money coming back to you after a few years. That's a legacy that's still not disappeared. The
extra sales that all life insurance companies do in the month of March are the clearest testimony
to this.

More recently, in the last four years, insurance was sold more through other lollipops – the
ULIPs (unit-linked insurance plans). ULIPs held out the promise of good investment returns in
line with stock market's dizzying rallies – and for the reluctant insurance customer, the bait of
offering a higher return on investment combined with some insurance proved successful. Most
companies reported that almost 90 per cent of their premium came from such products.

The core of an insurance product – the protection element that offered a hedge against
uncertainty/disruption caused by loss of life of the breadwinner-seemed to have got lost
somewhere. At best, this value was probably conveyed as an afterthought, almost like a side-
benefit or by-product of your stock market pickings.

Talk to companies about this and they tell you that these combo-products and other marketing
gimmicks were necessary given the nascent nature of the market and the need to improve
awareness of the product. It's now perhaps time for insurance companies to give some thought to
developing the market on the right lines and wean investors away from the bad habits of the past.

UNDER-SOLD

Most developed markets, we are told, have customers who possess on the average anywhere
between three and five policies. Here in India, it is the rare customer, (mostly a savvy
businessman,) who takes a second policy that takes into account the changes in his lifestyle,
income levels and higher risks. There is, therefore, as much potential in tapping even the existing
base, as there is in tapping the new entrant.
One reason why this has not perhaps received full attention has to do with the existing
distribution model that is still predominantly agent-led. Given the lop-sided commission
structure that put a premium on securing new business – but not in retaining the old business
(given the front loading of commission payments – as high as 40 per cent of first year premium
on some products), it is not surprising that agents focus more on new business.

The Swarup Committee on Investor Awareness and Protection had drawn attention to this aspect
a year ago, when it said, “Insurance policies need to remove the bias towards selling the policy
with the highest commission. Because there are almost three million or more agents who will
have to adjust to a new way of earning money, it is suggested that immediately the upfront
commission embedded in the premium paid be cut to no more than 15 per cent of the premium.
This should fall to 7 per cent in 2010 and become nil by April 2011. The interim period should
be used by insurance companies to help their agents make the transition to a more mature way of
selling.”

The report predictably drew strong criticism from the insurance industry, already fighting a
bruising battle with the mutual funds industry on the issue of level playing fields and distribution
commissions. The insurance regulator has also thrown its weight behind the opposition to these
recommendations. News reports have it that the finance ministry is in no hurry to implement
these controversial recommendations and may lean in favour of status quo as desired by the
industry.

The industry must, however, recognise that a shift to a trail commission model will help improve
persistency ratios besides proving beneficial for the long-term interests of the policy holders as
well as the companies themselves.

More education and training of agents as well as sustained campaigns to improve awareness
among customers are needed to help set the industry on a path of sustainable and healthy long-
term growth.

ULIPs: New look, new feel

Our Bureau

Hyderbad

After nearly six months of uncertainty and confusion for policyholders and industry, the unit-
linked insurance plans (ULIPs) are back in business.

Under the new ULIP regime, which came into force from September 1, the Insurance Regulatory
and Development Authority had cleared over 70 products, most of which have already hit the
market.
According to a senior IRDA official, the authority had “almost cleared” the new products filed
with it for approval.

“With the ULIP segment stabilising and normalcy returning to various stakeholders, the clearing
of ULIPs will be a regular/routine exercise like before,” he told Business Line.

Looking back, the last six months were stormy for regulators, Government, life insurers and the
policy-holders.

SEBI-IRDA row

The ULIPs, which had been a dominant business segment of the life insurance industry, came
under the spotlight when the Securities and Exchange Board of India (SEBI), on April 9, asked
14 life insurers not to sell ULIPs without its approval.

This kicked off a row that reached many counts. First, the contention of SEBI that ULIPs shared
similarities with mutual funds (MFs) and hence would fall under its jurisdiction was strongly
refuted by the IRDA and the industry. That Life Insurance Corporation of India was not included
in the list of 14 insurers targeted by SEBI irked private insurers. And, this created confusion
among the investors (policy-holders).

For instance, according to the IRDA data, during February 2008 and April 2009, 16.7 lakh
policies of ULIPs were sold with a total premium of Rs 44,611 crore. This was the magnitude of
business when SEBI issued the controversial order. Even during 2008-09, the ULIPs premium
was at over Rs 90,000 crore. The stand-off between the IRDA and SEBI continued till June 18
during which there was an attempt by the Ministry of Finance to restore peace by mediating
between the two regulators. Finally, the matter was taken to the Supreme Court forcing the Govt
to step in amidst growing criticism and the toll the row was taking on the business.

On June 18, the Government brought out an Ordinance (which was later approved by
Parliament) settling the issue in favour of the IRDA.

The Ordinance stated that the unit-linked insurance policies with investment component were
insurance products which will come under the regulatory jurisdiction of the IRDA and not SEBI.
It amended four Acts to make it clear that ULIPs were not securities and they did not form part
of collective investment schemes or mutual funds.

Joint Mechanism

To avoid similar regulatory turf war in the future, the Government had also set up a high-level
panel, called a joint mechanism — with representations from the RBI, SEBI, IRDA, PFRDA and
the Government.

It is now mandatory for the regulators to refer to the panel any dispute or difference of opinion
over the regulation of a hybrid product. The panel will have to give its decision to the
Government within three months and it will be binding on all regulators.
The panel appears to be similar to that of the existing High Level Co-ordination Committee of
the Capital Market under the chairmanship of the RBI Governor. The difference is that HLCC
decisions are based on consensus and are not binding on the members.

Significantly, the Ordinance has not only lifted the uncertainty that affected sale of ULIPs, but
has also brought relief to thousands of unit-holders who were worried about their investments
since the turf war broke out between the regulators in April.

With a slew of regulatory reforms, ULIPs have been made more investor-friendly with a special
focus on the long-term protection/savings objectives of life insurance.

The IRDA started ‘clean-up' of ULIP regulatory structure in May while simultaneously fighting
SEBI to protect/retain its jurisdiction. It had fixed the minimum term of ULIPs at five years,
made life-cover compulsory for pension funds. It had also asked agents selling ULIPs to disclose
to the customer the exact amount of commission they get (which was an issue of concern
expressed by SEBI).

This was followed by a ‘final' guidelines on June 28 which came into force from September 1.
With a view to smoothening the cap on charges, the limit has been rationalised to ensure that the
difference in yield is capped from the fifth year onwards.

Before the announcement of new norms, the cap was applicable only at the time of maturity. If
anybody pre-surrenders their policy, the return on investment is dependent on the discretion of
the insurer. The investor was also protected by fixing the maximum reduction in yield between 4
per cent and 2.25 per cent from the annualised premiums paid from fifth to fifteenth year of a
policy.

For pension and annuity products, the minimum guaranteed return would be at 4.5 per cent a
year on their fund value on the date of maturity.

Mortality cover

The three-year lock-in period ULIPs was also increased to five years including top-up premiums.
The mortality cover has also been increased to 10 times (from five times) of the annualised
premiums with death benefit to be not less than 105 per cent of the total premiums paid.

Most of the experts agree that the net impact of the regulatory stand-off is the customer-benefit
while industry has its own reservations. The life insurers had to withdraw nearly 250 ULIP
products from the market to make them comply with the new norms. At present, there are over
70 approved products in the new regime which are expected to increase in future.

According to the IRDA Chairman, Mr J. Hari Narayan, the real impact of the new norms and the
policy-holders response could be known only in April next. “From a customer point of view, I
think the regulatory issue had a positive impact of creating awareness on ULIPs which is very
much required.''
Insurance industry in India for quite a longer period relied heavily on traditional
agency (individual agents) distribution network IRDA (2004). As the insurance
sector had been fully monopolized by the public sector organizations for
decades, there was slow and uneven growth in the insurance business due to
lack of competitive pressure. Therefore, the zeal for discovering new channels
of distribution and the destructive marketing strategies were totally absent and
to an extent it was not felt necessary. The insurance products, by and large,
have been dispensed mainly through the following traditional major channels:

     1. Development officers

 
     2. Individual agents
 
     3. Direct sales staff

It was only after IRDA came into reality as the regulator, the other forms of
channels, viz., corporate agents including bancassurance, brokers (an
independent agent who represents the buyer, rather than the insurance
company, and tries to find the buyer the best policy by comparison shopping
2) internet marketing and telemarketing were added on a professional basis in
line with the international practice. As the insurance sector is poised for a
quick growth, in terms of business as well as number of new entrants tough
competition has become inevitable. Consequently, accumulation of new and
more number of distribution channels would become necessary.