Now that the spat between market regulator Sebi and insurance regulator Irda over unit-linked insurance plans (Ulips) has been put to rest by the presidential ordinance last week, it is important that the latter comes out with transparent guidelines on the commission that the insurance companies will pay to their agents and raise the lock-in period of the products.

As the current insurance act does not permit a company to pay a commission in the later years, it does not attract agents to continue the policy for a long period of time. Despite the fact that insurance products must be seen as long-term contracts, agents often promote them as three-year products. Distributors of Ulips charge a hefty front-loaded commission of as much as 40% on the premium for the first year and around 20% in the second year.

Insurance companies will now have to rework their products so that investors look at Ulips as a long-term investment and not surrender before maturity. The insurer, instead of charging high costs in the first few years, can recover its cost over the longer term and moderate agent commissions. So, going ahead, the viability of an insurance company will depend on the persistence of the products.

Most importantly, insurance companies will have to ensure that the lock-in period for Ulips be raised from the current three-year period to five years as it is done for bank deposits that are eligible for income tax benefit under Section 80C. This will attract serious long-term investors to put money into the product. Also by limiting the risk cover?mandatory risk cover is five times the annual premium?Ulips may not be meeting the actual level of insurance cover required by individuals. This needs to change.

Analysts fear that with the ordinance, agents will now sell Ulips more aggressively as there is no incentive for distributors to sell mutual funds to retail investors. In fact, after the Sebi ban on entry load for mutual funds from August last year, distributors are finding it difficult to mobilise fresh retail investment and some 70,000 strong distributors have raised their concern at various forums. Insurance companies, too, will also have to go for nation-wide investors? education programme to gain back the confidence of retail investors after the public spat between the two regulators.

saikat.neogi@expressindia.com