New rules seek to make it less attractive for insurance agents to hard sell Ulips
India’s insurance regulator on Monday announced comprehensive changes in the rules governing the controversial, but popular unit-linked insurance plans, or Ulips.
The new rules seek to make it less attractive for insurance agents to hard sell these hybrid instruments that offer a combination of insurance and equity investments to buyers.
The two most important changes made by the Insurance Regulatory and Development Authority, or Irda, are that insurers will have to spread the selling commissions they pay agents evenly over the lock-in period for a Ulip product and they will have to increase the lock-in period from three-five years. This will replace the current system of high upfront commissions that act as incentives to push Ulips into investor portfolios.
These changes come 10 days after Irda won a regulatory turf war with the Securities and Exchange Board of India on which agency had the right to regulate Ulips.
Insurance firms will have to adjust to the new Ulip regime.
“It will mean more capital for the industry. It will mean less profits,” said G. Muralidhar, chief operating officer of Kotak Mahindra Old Mutual Life Insurance Ltd.
The decision to increase the lock-in period for policyholders will also help ensure that customers get adequately convinced that Ulips are not really meant for making quick money even though the premiums they pay are invested in shares.
G.N. Agarwal, president of the Actuarial Society of India, said: “People were using certain loopholes in the law to pay more commissions. Now, the regulator has tried to address these issues. These (rules) will work until the new loopholes are found. That is what is called innovation.”
Mint had reported on 22 June that Irda was tweaking the existing norms to abolish the practice of hefty upfront commissions.
Irda mentioned in its circular that all regular premium Ulips shall have uniform/level paying premiums. “Any additional payments shall be treated as single premium for the purpose of insurance cover.”
This change is significant as many companies have been structuring products in such a way that the first-year premium is substantially higher than premium in subsequent years. This allowed insurance companies to pay high upfront commissions to agents. “But by saying that premiums should be uniform for all years, Irda has put an end to this practice,” said Agarwal.
Since agents’ commission on single premium policies are capped at 2%, taking the incentive out of such top-heavy premium structures, the commission charges will be significantly lowered.
In its earlier attempt to reduce upfront charges in Ulips, Irda had capped charges at 3% at maturity for products having tenures of up to 10 years and at 2.25% for products of above 10-year terms. Since insurers started offering such products charge benefits only on the maturity of the policies, Irda’s attempt to reduce upfront charges failed. But now, Irda has stipulated such ceilings on charges for every year of the policy, reducing from 4% at the end of five years of the policy to 2.25% from the 15th year onwards.
“Our proposal should bring down the first-year agent commission from 35% to 10-15%,” an Irda official had told Mint on 22 June. “Total commissions that insurance companies pay agents selling Ulips should come down—from the current 57.5% over five years to 30-32%,” the Irda official had added.
“Insurance companies reward long-term behaviour. Now,the calibration of lapsation has a significant impact. Earlier rule gave some leeway to insurers to design policies to motivate consumers to stay for the long term. Now Irda has removed the flexibility for insurers. We have a lot of work to do,” said Muralidhar.
Furthermore, Irda has mandated insurers to provide a mortality or health cover on all Ulips and ordered companies to offer a minium sum assured of 125% of single premium for policyholders buying Ulip below the age of 45 years. For entry above the age of 45 years, the minimum sum assured will be 110% of the single premium.
Irda said that all Ulip pension or annuity products shall offer a minimum guaranteed return of 4.5% per annum on the maturity date. This guaranteed return is applicable on the maturity date, for policies where all due premiums are paid.
P. Nandagopal, CEO, IndiaFirst Life Insurance Co. Ltd said, “The defining of a guaranteed return of 4.5% seems a little risky, especially in very long-term policies. Though it might look easy at the present interest rate levels, it could come into trouble if rates fall. It would have been better if it was linked to a benchmark.”
Also, Irda has said that the maximum loan amount that can be sanctioned under any Ulip policy shall not exceed 40% of the net asset value in those products where equity accounts for at least 60% of the total share and shall not exceed 50% of the net asset value of those products where debt instruments accounts for at least 60% of the total share.