ULIP Industry Caught Off Guard

ULIP: A Hugely Successful Product

Introduced back in 2001, Unit Linked Insurance Plans (ULIP) got off in India after the regulatory body, Insurance Regulatory and Development Authority (IRDA), announced its first major ULIP guidelines in 2005. Since then, ULIPs spread their wings across investors’ portfolios. The data released by IRDA has shown that for the year 2008-09, 70.3mn ULIPs policies, involving a total premium of Rs 906.45 bn were in force across 23 life insurers operating in India. Further, over the past few years, ULIPs have accounted for approximately 40-45 per cent of total premium (new business + renewal) income. In addition, booming stock markets during 2003-2008 added further impetus to ULIPs’ popularity, in anticipation of exploiting market returns.     

SEBI vs IDRA Tussle: Spoiling The Party

The menace of mis-selling hit the industry in 2007, for the first time, when IRDA took first major action after an insurance advisor attempted to sell a unit-linked policy to IRDA official with unrealistic projections. Under this, several measures have been taken to curb mis-selling, which included revision of the commission structure, a declaration by the agent of list of items disclosed to prospect, and an attestment from the prospect that he fully understood the implications of his investment decisions, etc. Subsequently, there were concerns on tight regulation of ULIPs along with. SEBI took the first stance in 2009 when it asked HDFC Standard Life, “Why its ULIPs are not registered with SEBI”. Sure, it wouldn’t have mattered much for investors at that juncture.

Come 2010 and changes were in the air. The exclusive regulatory guardianship suddenly came to occupy centrestage on 9 April, 2010, when SEBI issued an order barring 14 life insurers from launching new ULIPs, without registering them with SEBI. It argues that since the investment component of ULIPs involves investments in securities market, it requires a mandatory registration with SEBI. To add fuel to the situation, IRDA asked the insurer companies to continue business, as usual, the very next day. The subsequent weeks followed by an intense tussle between the two watchdogs and as the result, finance ministry had to get involved in the dispute over regulatory jurisdiction. And why not? The issue involved a whooping Rs 177 thousand crore worth of public money involved (AUM) in ULIP products (as on May, 2010). ULIP constitute 80-90 per cent of total insurance sales and has grown at about 25 per cent during 2006-2010.

What They Had To Say

Finally, the tussle ended with a government ordinance settling the issue in favor of IRDA, but not before an individual investor was puzzled about what he could have on offer while investing in ULIPs.  Even after the government ruling, short-term scenario of ULIPs went uncertain as expectations of regulatory changes were blowing the air. Many investors were also apprehensive about falling stock market and hence, their market linked investments, especially after having gone through noteworthy value erosion in investment during 2008 fall.    

Stringent Guidelines Followed

An avalanche of regulatory changes came hurtling down immediately after the ordinance. The most noteworthy among them are stringent ULIP guidelines. Ironically, the changes can be attributed more to the duel between capital market regulator SEBI and IRDA, rather than any consumer activism. The guidelines aimed at making ULIPs more attractive from a long-term investment perspective, overhauled the key existing rules related to lock-in period, Premium Payment Term, increasing minimum sum assured, modifications in ULIP pension products, net reduction in yield for every year and cap on discontinuance charge. The details of ULIP-related regulatory developments in 2010 are summarized below:

Old vs New ULIP Guideline

Source: IRDA, Media Reports

The new guidelines have come into effect from September 1, 2010. The insurance companies have made representations to the regulator through Life Insurance Council that some of the new requirements such as the minimum guaranteed return on pension policies at the accumulation stage might not be feasible due to infrastructural constraints (lack of long-dated debt paper in the market). There are also concerns over the proposed timeline. To implement new guidelines may be too ambitious, given the extensive work required at the companies.

Impact On The Industry

The IRDA guidelines favored consumer as new policies would come with lower charges, which would mean a higher allocation from premium towards investment. As per industry experts, yields might improve by as much 4 per cent. As a corollary to the higher transparency in products and capping of charges, the consumer will also get benefitted from the likelihood of reduced mis-selling. Besides, reforms would mean more standardized products across insurers and higher death benefits. On the contrary, for players, distribution business might come under strain in the short run. The following points would partially explain the tough times for insurer firms:

• The insurer typically has higher expenses in the first policy year, which as per the new IRDA guidelines, has to be recovered over the lock-in period of 5 years. This will give rise to new business strain and higher capital requirement, thus impacting the profitability of insurers.
• Lower premium rates with increasing competition.
• Most insurers are left with little (2-3) ULIP policies to sell, since the insurance regulator hasn't yet approved all new products.
• The level of interest of agents will come down due to lower remuneration structure. There will be an increase in demand from customers due to the attractive features of the product. But since insurance is more a push product than a pull one, overall ULIP sales will suffer.

The reasons behind ULIPs not being sold as aggressively as they were are:

1. Reduced Commission in ULIP's,
2. Only smaller chunk of commission would be paid in initial years. After 5 paid premiums, agents will get a sizable commission
3. If policy will be surrendered within 5 years, no commission will be paid to the agent

As per IRDA data, ULIPs accounted for 88.34% of total private insurer sector premium income in 2007-08. This figure fell marginally to 86.8% in 2008-09. However, 2010 saw a huge fall to 70% and the income in 2010-11 was even worse at mere 46.5%.

In terms of numbers, ULIP sale from LIC has still remained healthy as its all 3 ULIP products, launched since September, have shown robust growth. According to IRDA data, during the first 10 months of 2010-11, LIC collected Rs 67135 crore by selling new policies, which is an increase of 37 per cent, as compared to the Rs 49020 crore collected in the corresponding period in the previous fiscal.

Sweeping Changes In ULIPs Regulations

LIC’s three plans, namely, unit-linked Endowment Plus plan, Pension Plus and Samridhi Plus contributed Rs 5,600 crore, Rs 500 crore and Rs 300 crore respectively. In comparison, private life insurance companies have seen a sluggish growth in the financial year 2010-2011. In the first 10 months, they have collected Rs 27865 crore by selling new policies, a modest 5.8 per cent increase against Rs 26328 crore collected a year before. ULIP contribution toward new business has been a just Rs 1250 crore (As per data as on 8 March, 2011).

ULIPs Contribution To Policies Sold In 2010-11 (Up To 8 March, 2011)

Source: Media Reports

As per Life Insurance Council data, an industry body of life insurance companies in India, Life insurance industry paid Rs 10954 crore in commission to insurance agents in 9 months during April-December 2010 period. Total commission paid to agents fell to 5.88 per cent of the total premium collected, against 6.41 per cent in the same period last year. The number of agents also dipped by 2,73,984 to 27,10,301, as compared to 29,84,285 in 2009. Life Insurance Corporation, the only state-owned life insurer, also reduced its agent strength by 62,956 during the calendar year.

What To Expect In Near Future?

The insurance sector saw a series of changes in 2010 and is yet to show its aftermaths completely. ULIP industry will go through a major transition as players need to reinvent themself to adapt to the new regulatory regime. On the flip side, expenses have to be capped, companies have to realign or re-engineer the way they expand their branches, hire people and use technology. For insurance companies, it will take at least another three to four quarters before things stabilize. But even then, their margins won't be comparable to those that they have enjoyed before September 1, 2010. So, cost management and distribution channels will become keys in deciding how well the business will flourish.

Insurer going online

Following the cap on ULIPs charges, it is imperative for players to look at alternative distribution channels to bring down costs. Many companies have taken the online channel as IRDA allows differential rates for offline and online products. Some insurers also offer online term policies that are significantly cheaper (by up to 45 per cent in some cases). Thus, online model is expected to gain momentum in the near future, though the online channel as of now does not contribute significantly to the total sales pie.  

Volatility

With prolonging volatility in the equity market, life insurers have to keep innovating on market-linked products. The timings of the launch of new products would depend on the needs of customers.

Focusing on single-premium products

With growth in life insurance sector being sluggish, players are aggressively tapping single premium space and coming out with new products or an option to pay in single premium. Unlike past, when only LIC was focusing on single premium products, private insurers have also started aggressively marketing their products to get sales from this space.

Focus on traditional plans

Companies are more inclined towards selling traditional plans due to lesser payouts to customers at maturity as well as in the event of death. Also from the customers’ point of view, they are opting for term plans as they still haven’t come to the terms of new guidelines, where lot of issues are still unaddressed and forces customers to wait till IRDA come up with clarifications. For agents, their commission has reduced in ULIPs; therefore, they are not inclined to promote ULIPs.