Customers should be aware of risk inherent in Ulips

Written by Prakash Praharaj | Updated: Nov 2 2011, 04:51am hrs
The growth of any consumer industry depends on the trio of the manufacturer, distributor and consumer. Life insurance is no exception. While the insurance density in India (per capita premium) is estimated at $47.7 against the global average of $341.20, life insurance penetration in the country is hovering around 4% over the last two years and has stagnated.

Insurance was opened up for the private sector in 2001, but growth became visible only from 2006 with the introduction of unit-linked insurance products (Ulips).

The y-o-y growth of life insurance during 2006 and 2007 was more than 100% and Ulips constituted 60-90% of the manufacturers premium. It was positioned more as a wealth management product and its USP of high returns fitted well with the then bull run in the capital market. Distributors and brokers were happy with their commissions and customers with the returns.

Then came the 2008 crisis and the bull phase of the equity market reversed. Something had gone seriously wrong with Ulips. In many instances, customers were not explained the product features properly and they failed to understand the market risk inherent in them. In 2009, Sebi banned entry load in the MF industry. In April 2010, Sebi questioned the Ulip, too, and Irda responded by revising norms for them from September 1, 2010. The changes reinforced the protection aspects, longer tenure of contracts and capping of the charges.

It was a customer-focused move, but affected the distributors because of the cap on their earnings. Many preferred to leave the industry as can be seen from the decline in the number of independent advisors from 29.78 lakh as on March 2010 to 24.27 lakh as of June 2011. Collection of renewal premiums has became a challenge now.

Irda has now strengthened the grievance redressal mechanism and the fraud monitoring process, and relaxed revival procedures aiming at improving persistency.

But what is most important is reviving the interdependent relationships between the manufacturer, distributor and customer and establishing trust and confidence in each other. Manufacturers need to reorient their market share-driven strategy of business growth. The distributors need to keep customers interest in mind in addition to their income. No business can sustain in the long run ignoring the customers interest and it has to happen on the ground and not by Irda regulations alone.

Simplification of products will go a long way in establishing the connection with customers. The various charges can be categorised in to fewer categories like entry charges, recurring charges and exit charges.

The demand for annuity products will increase in the coming months, but there are not many options available to customers. The PFRDA has started looking at strategising for the annuity products and it will put pressure on the manufacturers in the days ahead. There is a need to reorient selling strategies. The sales force should be equipped with knowledge of financial planning and life insurance should be sold only after a proper need-analysis.

The manufacturers should have robust risk management system and practice with support from the top management.

Customer education by the manufacturers can be taken both through online and offline processes. Features of guaranteed products need to be explained so that miscommunication is avoided. Restoring the confidence of the customers and involvement of distributors is the key to healthy top line and bottom line growth of the manufacturers.

The writer is chief financial planner, Max Secure Financial Planners