The recent spat between IRDA, the Insurance Regulator and SEBI, the Capital Market Regulator created an outcry in the market with each party holding its supremacy over the much sought and widely circulated insurance product, Unit Linked Insurance Products (ULIPs) in India. The Government of India in quick solution passed an ordinance to support the IRDA regulation over ULIPs ending the market speculation that SEBI might make Ulips in line with Mutual Funds.
Fresh from its victory in the regulatory turf war over ULIPs, the IRDA announced a set of regulations. With the expansion of insurance sector and more innovative insurance products, particularly Unit Linked Insurance Products (ULIPs) entering into Life Insurance products list, IRDA has been sensitive to the changing scenario. In the past, IRDA has come out with various steps to bring in changes in the regulatory framework to address various concerns of the policyholders.
IRDA in a note stipulated that insurers must provide the prospect/policyholder all relevant information regarding amounts deducted towards various charges for each policy year so that the prospect could take an informed decision. IRDA also raised the concerns of mis-selling and Distance Marketing which require guidelines from the insurance regulator. Further, IRDA set up an exclusive Customer Affairs Department that focuses on consumer related issues and initiatives including grievance redressal and consumer education through Insurance Awareness Campaigns. It is perhaps the most important step in the interests of policyholders.
Recent Regulatory Proposals
ULIPs are hybrid instruments that combine elements of mutual funds and insurance. In most cases, the insurance amount is capped to 5-times of initial insurance premium. Recently, IRDA came out with guidelines governing ULIPs – how such products are sold/bought; how ULIPs can be better financial instruments for providing risk coverage and many more. Some of the ULIPs related regulations are as given below:
1) Level Paying Premium
All regular premium /limited premium ULIPs shall have uniform/level playing premiums. Any additional payments shall be treated as single premium for the purpose of insurance cover.
2) Compulsory Cover
Currently there are a number of ULIPs schemes where there is maximum insurance cover up to five times of the premium paid or no insurance cover. Now it has been recommended that the life insurance component has to be at least 10 times the premium paid for policies up to 10 years and at least 1.05 times the annual premium for policies of 20 years and above.
3) Lock in Period increased to Five Years
IRDA has increased the lock-in period for all ULIPs from three years to five years, including top-up premiums, thereby making them long term financial instruments which basically provide risk protection.
4) Minimum Premium Paying term of Five Years
All limited premium ULIPs, other than single premium products shall have premium paying term of at least five years
5) Even Distribution of Charges
Charges on ULIPs are mandated to be evenly distributed during the lock-in period, to ensure that high front ending of expenses is eliminated.
6) Pension Plans to have Guaranteed Return
As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by IRDA from time to time. This will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity.
7) Rationalization of Cap on Charges
With a view to smoothen the cap on charges, the capping has been rationalized to ensure that the difference in yield is capped from the 5th onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the policyholder.
Though these regulations have been rolled out for the benefit of common policyholders, the insurers will have a level playing field with other players and will benefit in the long run.
