The guaranteed returns sweetener in Ulip schemes that insurance regulator Irda allowed companies to use to win the battle against mutual funds has started backfiring.
Private life insurance companies have approached the Insurance Regulatory and Development Authority (Irda) to revise the 4.5% guarantee clause on unit-linked insurance products (Ulips), saying it is unsustainable in the long run. The companies are also not willing to launch any Ulips or annuity products till the revision is made. They would prefer the regulator to instead link the returns on these products with comparable instruments such as government securities.
They have argued that as there are no long-term financial instrument in the country that can offer a guaranteed return for a period of 15 to 20 years, it is difficult to find ?safe? investment avenues for the Ulip premium to match those guarantees.
Confirming the development, Deepak Sood, managing director and chief executive officer of Future Generali Life India Insurance, said the concept of such returns goes against the principle of market-based instruments like Ulips. ?We feel that the level of guarantee that we have to give is neither beneficial for the customer nor the insurer. Insurers find it difficult to guarantee for a long period of time and the customers who take Ulips expect much higher returns. The rates hardly compare with the current interest rates and that is the reason why we have not come out with any new pension product,? he said.
Sood said that if guarantees from Ulips are removed, they will come out with a pension product.
An Irda source too confirmed that the insurance companies had sounded out the regulator on the issue.
Last year, Irda and market regulator Sebi had clashed over who should regulate essentially stock market-linked products. Sebi wanted Ulips to be regulated at par with mutual funds, from which it had withdrawn several incentives as they competed for the same pool of investors. Unable to reconcile their differences, the two were advised to approach the Supreme Court by the finance ministry, but in the interregnum the ministry issued an ordinance giving Irda the regulatory control. Surprisingly, the revised guidelines issued by Irda introduced a guarantee clause on Ulips, even though after the 2001 UTI episode the government had decided it would eschew all guarantees from market-linked products.
Some of the companies FE talked to said they have received petitions from investor bodies to hike the guaranteed returns as inflation remains stubbornly high. Because of the difficulty of providing guarantees, from September last year ? when the regulator came out with new guidelines on Ulips ? companies have virtually stopped selling new product in this category as they have not been able to calculate a profitable formula to design such a product. The only exceptions are the two biggest players ? HDFC Life and ICICI Prudential ? among the 22 private sector life insurance companies. However, Life Insurance Corporation, the only public sector firm in life insurance, has launched a new unit-linked pension scheme that guarantees 4.5% returns. Before September 1 last year, Ulip pension products accounted of about 40% of the total sales of Ulips. The other private sector insurance companies feel the guaranteed returns will whittle down their market share and create more concentration in the sector.
Irda data shows that the private life insurance sector saw a decline of 4% to Rs 30,451 crore in first-year premium income during the 2010-11 fiscal. The drop was sharp during between October and March 2010-11, when the first-year premium income of private insurers dropped 35%.
Private life insurers are instead selling traditional pension plans, which often have high charges. ?The pension plans that most companies are selling are traditional pension plans and not Ulips. So, basically, unit-linked pensions are as good as dead now,? said Shankar Nath, founder of PolicyTiger.com, an online insurance comparison site.
