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,” said.
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.”
