Good news today for Customers and Insurers alike!
The Ministry of Finance ended the ambiguity surrounding Unit Linked Insurance Plans (ULIPs) through an ordinance that makes these plans fall under the regulatory purview of the Insurance Regulatory and Development Authority of India (IRDA). The ordinance comes into force from June 18, 2010 and will be placed before the parliament to be enacted as a Bill in the next parliamentary session.
The Finance Ministry effectively clarified the regulatory / supervisory role of IRDA over all Insurance linked plans. ULIPs will, therefore, continue to be regulated by IRDA and will not be considered as a security or collective investment scheme as defined under the SEBI act.
This ends the ongoing uncertainty and legal tussle surrounding these products that was initiated in April this year when SEBI laid claim to these products as being schemes that should be governed under the SEBI act and issued notices to insurers asking them to have any future products approved by SEBI prior to launch. While the public confrontation of the two regulators was not doing any good to the investor’s confidence, IRDA pushed forward in initiating changes to the structure of these products to reduce the parity with Mutual Funds and enhance customer value – by initiating changes to products and charge structures, which will reduce cost to customer and ensure products carry a minimum insurance cover – see our earlier post on The SEBI-IRDA tussle and the impact on Consumers .
These changes seem to be in the right direction and were largely viewed positively – in the Finance Ministry and the media. Except for the changes to Pension Products to carry a minimum insurance cover, which may not benefit customers accumulating a Pension closer to Retirement Age, and being opposed to by the Insurance Companies.
The clarity that the new law brings about will be good for the overall financial services industry and the IRDA will likely continue to amend the structure for ULIPs to deal with issues raised so far. The changes (some already implemented and others proposed) include compulsory life covers, increased policy term to 5 years, cap on charges, disclosure on commissions received by intermediaries and reduced surrender charges are all beneficial to the customer – see our earlier post on The SEBI-IRDA tussle and the impact on Consumers .
The only remaining issue that seemingly remains to be tackled is the prevalent practice of deduction of upfront charges used to pay upfront intermediary commissions which has continued to receive maximum criticism.
Even though the overall charges have been capped by IRDA, these caps are effective only if the policy is active for its entire term – 10 years or more. The Insurance industry’s argument here is that the products are for long term savings and so the investor should look at the charges over the entire term. The argument will probably need to be reviewed with most critics demanding a charge structure that is more evenly spread through the term of the policy and consequently have the distributor commissions also rationalised accordingly.
What one can safely conclude from all that has been happening and will continue in this space is that the world is changing to the benefit of the customer. One will now have enough options for varied needs of savings and investments with considerably reduced charge structures, simplified products and higher transparency. Hopefully, this should progressively translate into enhanced customer confidence and a move away from the Indian customer’s preference for Bank deposits to higher participation in market linked products that offer meaningful capital appreciation. Insurers, who had deferred launch of new products awaiting clarity, will now be able to move forward and bring new ULIPs to the customer.
That is the Regulatory push to get customers a fair deal.
Market forces are the other key factor as companies redefine their business models to compete for customers in this lower cost / lower charges environment.
The internet can potentially play a defining role – both in delivery of products to customers at a lower cost; and in enabling customers to search for and compare products online. This type of transparency will allow customers to save money; and push the agenda for lower cost products further through market competition.