Last few months saw a big debate on unit-linked insurance plans (Ulips). Some of the criticism largely centred around low protection element and more of an investment-related instrument, higher upfront charges, short-term product rather than long term and mis-selling of especially Ulip-based pension policies. However, Monday’s fresh guidelines on Ulips have attempted to correct the situation. The increase in lock-in period from three years to five years is set to clearly position Ulips as a long-term product. The minimum sum assured limit has substantially increased the protection element. The compulsory annuitization of pension policies is also a good step and will largely minimize the mis-selling in Ulip-based pension policies. The discontinuation, i.e. surrender charges, have been capped which is also a good move as companies cannot take the benefit of lapsation and have to work towards keeping policy live. The only flip side for the customer is that one can’t revive the policy beyond 30 days. Overall a very positive and timely move towards protecting customer’s interest. This in itself will take care of most of the Ulip issues. However, all these good features get nullified by two features.
First is about the offering of minimum 4.5% guarantee on pension products. Pension products are long term in nature and could extend to 30-40 years. There are umpteen examples where life insurers have gone bankrupt offering high guarantees for long term in the past. Besides the constraints on investment options that gets restricted only to government securities, this minimum guarantee would actually become maximum for customers. Thus, while on one side insurers will be reluctant to offer this guarantee for long term, on the other hand even if they do so it will end up resulting in being the maximum return for policyholders. This can be at best described as a lose-lose situation for both.
The second issue is about capping of charges. The fresh guidelines have brought a capping of charges from the fifth year onwards, which means that the overall allowance of expenses for insurance companies comes down dramatically. In such a case, I foresee that the first year commission will not be more than 5% and each subsequent year it will be only 2%. Since allowance is low, it means small premium policies (up to Rs15,000) will become unviable for insurance companies. Today almost 50% of the policies come in this range of low-ticket premiums. Thus customers of middle and lower income level will no longer be able to afford regular premium Ulips. The minimum premium in single premium is even higher, so it basically means that half of the potential customers especially in the rural areas can’t buy Ulips.
These measures will also have major impact on distribution. Individual agents who work full time for life insurance business and are in top 1% of the total agency force would be doing about two policies a month. If these two regular premium policies generate 5% commission and some renewal commission, the income of agent would be less than Rs10,000 a month. This basically means that individual agents will find it impossible to make insurance sustainable as a career. If they become part-time agents, the quality of advice as well as service to policyholder will suffer drastically. Experience has shown that relying solely on institutional distributors is not beneficial for customers in long run.
This will also affect the volume of business of insurance companies as it will come down substantially and the pressure of expense will then become even more severe. Thus profitability of the industry which anyway is quite poor will take a huge hit. The only option left, as I see it, is insurance companies scaling down the distribution network and unwilling to have offices in rural and semi-urban areas.
There is no denying the fact that changes in Ulips structure was very much required. The issue at hand now is how to find the right balance, as moving from one extreme to another doesn’t benefit anyone. In my view the minimum guarantee of pensions needs to be reduced and should be applicable for that year. This rate can be linked to a benchmark and decided each year by the Insurance Regulatory and Development Authority. This will ensure good deal for customers and manageable risk for insurers. On capping of expense guidelines, it should be changed and linked to the premium amount. Small ticket policies of less than Rs20,000 should have higher allowance. Thus at end of fifth year, the difference in yield for this set of policies should be 5.5%.
I strongly believe that Ulips with above suggested changes will be much better option for customers than buying traditional policies as returns in all probability will be much better.
First is about the offering of minimum 4.5% guarantee on pension products. Pension products are long term in nature and could extend to 30-40 years. There are umpteen examples where life insurers have gone bankrupt offering high guarantees for long term in the past. Besides the constraints on investment options that gets restricted only to government securities, this minimum guarantee would actually become maximum for customers. Thus, while on one side insurers will be reluctant to offer this guarantee for long term, on the other hand even if they do so it will end up resulting in being the maximum return for policyholders. This can be at best described as a lose-lose situation for both.
The second issue is about capping of charges. The fresh guidelines have brought a capping of charges from the fifth year onwards, which means that the overall allowance of expenses for insurance companies comes down dramatically. In such a case, I foresee that the first year commission will not be more than 5% and each subsequent year it will be only 2%. Since allowance is low, it means small premium policies (up to Rs15,000) will become unviable for insurance companies. Today almost 50% of the policies come in this range of low-ticket premiums. Thus customers of middle and lower income level will no longer be able to afford regular premium Ulips. The minimum premium in single premium is even higher, so it basically means that half of the potential customers especially in the rural areas can’t buy Ulips.
These measures will also have major impact on distribution. Individual agents who work full time for life insurance business and are in top 1% of the total agency force would be doing about two policies a month. If these two regular premium policies generate 5% commission and some renewal commission, the income of agent would be less than Rs10,000 a month. This basically means that individual agents will find it impossible to make insurance sustainable as a career. If they become part-time agents, the quality of advice as well as service to policyholder will suffer drastically. Experience has shown that relying solely on institutional distributors is not beneficial for customers in long run.
This will also affect the volume of business of insurance companies as it will come down substantially and the pressure of expense will then become even more severe. Thus profitability of the industry which anyway is quite poor will take a huge hit. The only option left, as I see it, is insurance companies scaling down the distribution network and unwilling to have offices in rural and semi-urban areas.
There is no denying the fact that changes in Ulips structure was very much required. The issue at hand now is how to find the right balance, as moving from one extreme to another doesn’t benefit anyone. In my view the minimum guarantee of pensions needs to be reduced and should be applicable for that year. This rate can be linked to a benchmark and decided each year by the Insurance Regulatory and Development Authority. This will ensure good deal for customers and manageable risk for insurers. On capping of expense guidelines, it should be changed and linked to the premium amount. Small ticket policies of less than Rs20,000 should have higher allowance. Thus at end of fifth year, the difference in yield for this set of policies should be 5.5%.
I strongly believe that Ulips with above suggested changes will be much better option for customers than buying traditional policies as returns in all probability will be much better.
Source:-http://www.livemint.com/2010/06/29203026/New-guidelines-good-for-Ulip-i.html?atype=tp
