Decision Time in India: ULIPs Are Insurance

A protracted tussle over who would regulate Unit-Linked Insurance Plans (ULIPs) has been going on in India.  ULIPs are variable life and annuity products that have constituted a considerable majority of the booming Indian life insurance market in recent years.  They have been popular for a number of reasons, not least because they have given Indian retail investors a tax-advantaged way to invest in India’s capital markets.  They have been particularly popular with India’s 3-million-odd insurance salespeople because they offered an opportunity to book a high-commission sale.  They became even more popular with the agent community after mutual funds, which had been similarly profitable to sell, were made a fee-only product in August 2009. With the incentive to sell removed, Indian insurance agents/financial advisors chose to sell the more lucrative ULIPs.

ULIP Insurance India had always been regulated by the Insurance Regulatory & Development Authority (IRDA).  In April 2010, India’s capital markets regulator, the Securities and Exchange Board of India (SEBI), which had been saber-rattling over ULIPs, issued an edict that the products should be brought within its mandate.  The next business day, the IRDA rejoined that SEBI had no authority over ULIPs, and that insurers and distributors should carry on as usual.  Fear and confusion reigned, however, as insurers and regulators tried to determine what to do, and the issue escalated to India’s Finance Minister and Supreme Court.

Last week a decision was finally reached regarding jurisdiction over ULIPs: They remain the sole province of the IRDA, in a rebuke not only to SEBI but also to a reformist faction, the former head of the Indian pension’s regulator, and much to the surprise and consternation of India’s burgeoning if not nascent financial planning and education communities.

The battle has not been fought entirely in vain, however; just yesterday the IRDA came forward with a set of regulatory changes to ULIPs (on the IRDA website, look under “What’s New”).  The regulator reduced the maximum fees and commissions associated with the products, extended their lock-in periods, and mandated that higher levels of insurance cover be included in them.  In general, these modifications make the products more consumer-friendly, less profitable for insurance agents, and less susceptible to churning.

As the dust settles, the new regulations will probably constrain growth somewhat for India’s life insurance sector, resulting in further professionalization of India’s insurance distribution world.  From the perspective of long-term sustainability, this should be a good thing.

Source: http://www.articlesxpert.com/admin/content-view/article/1272440/