With the recent meltdown in equity markets exposing the downside of the insurance industry?s favourite product in recent years?unit-linked insurance products (Ulips)?the damage control has begun. As a start, the industry is working to standardise fee structures to make Ulips more transparent. Ulip sales have dipped by 8.3% between April and September this year in tandem with the domestic bourses, which dropped by 17% during the same period.
In contrast, last year when stock markets were on a bull run, Ulips registered an astronomical growth of 95% until September 2007. In 2007-08, of the Rs 92,988.71 crore in first premiums earned by life insurers, around 70% came from Ulips. In these policies, the entire corpus of the premium can be invested in equities. This makes these schemes runaway winners in booming markets and equally a nightmare in meltdowns.
Investors faced with an erosion of net-worth are now demanding that insurance companies make clear the percentage of the premium corralled as administrative and other charges. At present, the charge structure for Ulips varies across policies and insurers and often includes a bewildering assortment of fees.
These charges differ across companies and are levied at different rates, usually 25-40% of the first three years? premium. Responding to complaints, the Life Insurance Council, the industry body with membership drawn from all insurance companies, has decided to ask members to standardise Ulip charges and the method of calculating them.
?We are actively working on standardising the way charges are calculated to enable customers to better understand costs across products and companies. It will help them make more informed investment decisions,? says Life Insurance Council secretary-general SB Mathur.
The council?s recommendations are not mandatory, but companies generally abide by them. Regulator Irda also refers contentious issues among companies to the council. Once the norms are standardised, the council will move Irda for approval.
It hopes the move will help staunch the bleeding in the sector.
?The cost structure for unit-linked products is very complicated and unless a subscriber is good at accounting, he will not understand it. The move to simplify the structure will help customers, especially now that the products are not so popular because of the stock market volatility,? says Noopur Agarwal, an analyst with Northbridge Capital.
However, standardising the cost structure will not translate into cheaper policies. ?The charges are incurred on services that we provide, and unless the costs of these services go down, will not be reducing our charges,? a private insurer points out.