Hope it seems is at hand for an early resolution of the SEBI-IRDA tussle on regulatory turf on the supervision of ULIPs. “We will resolve this issue soon” the Finance Minister, Pranab Mukherjee, is reported to have stated at a function at the Insurance Institute of India, yesterday.
ULIPs are Unit Linked Insurance Plans that provide for an investment structure which is market linked together with Insurance cover. Unit Linked Funds are similar to Mutual Funds but have inbuilt Insurance cover and a different charge structure. With ULIPs becoming increasingly popular in recent times, there were concerns raised by SEBI on their similarity to Mutual Funds.
In April 2010, SEBI sparked off a turf war with the IRDA by requiring Insurers to register with SEBI and not to launch New Unit Linked Plans without registration. IRDA had promptly responded by issuing a directive to Insurers to continue selling ULIPs and not to take action on the SEBI directive. The matter was referred to the Finance Ministry and a joint decision made to approach the Supreme Court for jurisdictional clarity.
The IRDA has recently taken a number of steps to reduce the parity between Mutual Funds and ULIPs by requiring product changes that increase the quantum of insurance cover in ULIPs, especially Pensions; and a requirement that there be no surrender charge after 5 years of a policy. From July onwards, all existing products have to be refiled to meet the requirements.
Other product changes have been drafted and circulated for comments, including one that puts a cap on ULIP surrender charges at 15%. Insurance products have typically paid a large upfront commission to agents and distributors; and the insurance companies earn this back over the period of the policy. The surrender charge has been the accepted method for ensuring that the insurer does not lose money in the event a policy is discontinued (paid up or surrender). It would be difficult for insurers to continue to pay the current commission rates in the event this order is implemented.
The effect for customers will be that products will become cheaper and penalties for early withdrawal or surrender will be reduced. See our blogpost “The world is Changing”
From the Finance Ministers statement it seems that these actions have been viewed positively by the Ministry. Mr. Mukherjee is quoted in LiveMint as saying “I understand that IRDA has taken some very positive steps in respect of regulation of ULIPs which are in the interest of both the insurance industry as also the policyholders.”
The Hindu Business Line reported Mr. Mukherjee as saying ““Some of these measures, such as cap on charges, extending the minimum term of the policy to five years, bringing the concept of compulsory annuitisation in pension policies and the proposal of fixing the maximum limits of surrender charges have brought in the much needed reforms in the ULIP products”
An early resolution to the issue will be good for the industry and for the consumer. SEBIs recent directive has had the impact that new ULIP products are facing approval delays,.A number of insurers have reportedly filed products, both for offline and online sales, which are pending with the IRDA. Consequently, customers lose out on new product offers.
Importantly an area that the IRDA and Finance Ministry are focused on is the need to leverage technology to lower the cost of delivery of insurance products to the consumer. i-save has been speaking of how the internet can be used by consumers to save money. Consumers can search and compare products in order to buy the most suited product; leveraging the growing momentum in insurance companies wanting to reach the aware consumer with products on the internet that have a lower cost and price to the consumer. The Hindu Business Line quotes Mr. Mukherjee as saying about Technology.. “It has the potential to save cost and hence, the scope for reducing price of product. E-commerce will be increasingly used in all sectors, including banks and insurance, and products will be sold on the internet”
Positive steps indeed for the consumer!
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