As SEBI Vs IRDA war continues, many investors are in a dilemma on whether to withdraw from ULIP and invest in other safe investment instruments.
When it comes to investments, there are some decisions which are prudent from an individual standpoint of view, but it may damage at the macro level. Insurance companies may suffer if investors stop buying unit-linked insurance plans (ULIPs). But, from an individual’s point of view, there are enough reasons for him/her not to purchase ULIPs till the dispute between the Insurance Regulatory and Development Authority (IRDA) and Securities and Exchange Board of India (SEBI), over who will regulate this product, is resolved. It does nobody much good when policemen fight, and the ongoing spat between SEBI and IRDA is particularly harmful. The eight million investors in equity-linked products are not getting any comfort from the public battle.
What are ULIPs?
The ULIP is a product that pools retail investor money and allows a fund manager to target a return from market-linked products such as stocks and bonds. The aim of the product is to grow the money to provide for planned future needs of an average family. It is predominantly an investment product with just about 2 per cent of the premium going towards life cover and the bulk getting invested in market-linked products. From the point of view of investors, the ULIP is a mutual fund with a free crust of insurance thrown in.
Typically, an ULIP works in this manner. A policyholder puts in an ‘X’ amount of money for certain years. His money gets invested in both equities and debt, depending upon his risk appetite. There are plans where the sum is assured, thereby assuring policyholders of a certain sum if they were to survive the policy period. But the premiums are extremely high. For example: If a 30-year old were to buy a 20-year ULIP with a sum assured of Rs 10 lakh, his premium would vary from Rs 25,000 to as much as Rs 200,000. On the other hand, a term plan which is the purest form of insurance would cost a mere Rs 3,370. The only problem: If one survives, he/she stands to lose the entire amount of Rs 67,400 (3,370x20) paid as premiums in a term plan.
As Raghuvir Yadav, financial consultant puts it, “Insurance is bought so that if a family member dies, the family is assured of a certain amount. ULIP, being market linked; defeat this purpose because of the uncertainty in the eventual benefit. In case of an untimely death, the family of the policyholder gets the higher of the sum assured or market value of the scheme.”
What makes Ulips controversial.
The SEBI and IRDA have been engaged in a tussle on unit-linked insurance plans. The controversy about SEBI trying to regulate ULIPs has generally been presented to the public as a case of two regulators struggling to defend their turf. However, it is much more than that. At one level, this conflict represents a comprehensive failure of the basic architecture of India’s financial regulations. This architecture is based upon IRDA regulating insurance companies and SEBI regulating all investment vehicles, which expose investors to market risk. The current conflict arises from the fact that market-linked securities form a bulk of the business of insurance companies.
The conflict is sharpened by the very different rules that IRDA and SEBI upon what are essentially identical products. SEBI-regulated mutual funds are far lower in cost, and higher in transparency and customer-friendliness than IRDA regulated ULIP. SEBI’s approach has generally been focused on ensuring a better deal for customers, whereas the IRDA is more worried about the health and well-being of the insurance companies and agents.
And the battle rages on with the SEBI issuing a statement that new launches post-April, 9 will need its nod. SEBI’s main grouse: Since ULIPs are investment products as well, they should follow its guidelines. But IRDA says there is no case for dual regulation of ULIPs. Between the two regulators are 70.3 million ULIP policies (as on March, 2009) and premium of Rs 90, 645 crore - certainly, not a small amount.
ULIPs – The story from start…
The Finance Ministry’s Central Board of Excise and Customs (CBEC) think unit-linked insurance policies are similar to mutual funds because of the market link. This was even before the two market regulators started tug of war regarding the command over regulation of ULIPs, in February 2008. They have repeated this view again in February 2010 which said, “ULIPs are broadly similar to the mutual funds, except that they are required to segregate a certain part of the premium towards the life insurance of the plan holder.”
In February, 2008, the indirect tax department had said that ULIPs enables the policyholder to take part in the scheme collectively and become the beneficiary like mutual funds. Now, in January 2010, the SEBI issued show-cause notices to some life insurers asking why action should not be taken against them for selling ULIPs without its approval, as these products invest majority of their corpus in capital markets. Since December 2009 both SEBI and IRDA have been arguing over the regulation of ULIPs and on 9th April 2010 SEBI banned 14 insurance companies from raising funds through unit-linked insurance policies, which invest the money collected into equity and debt markets. SEBI had decided to issue the order to 9 more insurers including Life Insurance Corporation of India (LIC) from selling ULIP, but IRDA asked the companies to ignore the SEBI order and do business as usual.
Recently, Finance Ministry said that they need to look and discuss the orders of both the regulators – IRDA and SEBI. The Government changed its stand as few insurers considered approaching the court. Also LIC would be stopped from selling ULIPs and the government is the guarantor of all policies sold by the state owned LIC.
The ball has since gone into the Finance Ministry’s court. Finance Minister Pranab Mukherjee said that SEBI and IRDA have agreed to maintain the status quo that existed before market regulator’s ban. The turf war concerns the nature of ULIPs which account for over 50 per cent of the total life insurance business in the country.
So where do investor figure in the mess?
The dispute between regulators has left many investors confused. Some of the doubts that investors may have: What is the status of my existing ULIP after the SEBI ban? Should I continue to pay my renewal premium?
For existing policyholders as well as new entrants in the field; there isn’t any major concern over your investments. With both the regulators agreeing to jointly seek a binding legal mandate from a Court in this matter, there is as of now no change in the status of your ULIP. Raghuvir says, “If you have taken the ULIP to meet any of your financial goals, you should not stop paying the annual premium. The insurance companies will continue to accept the renewal premium. SEBI’s clarification recently also exempts ULIPs existing as on April 9, 2010, from the earlier ban.”
He says, “Existing investors need not worry about there investments in ULIPs. The issue of safety will arise only if the insurance company is going bankrupt. In ULIPs, the money collected is mainly invested in equity and debt instruments based on the mandate of the policy. Whatever the outcome, it is a step in the direction of protecting your interest.”
“While not buying is a reasonable decision, it would also be reasonable for existing policyholders to continue with their policies. This would apply to even those investors who bought their policies in March and now have the option of returning the policy under the free-look period,” Raghuvir added.
But existing and prospective investors in ULIPs need not panic as the primary mandate of both the regulators is to protect the interests of the policyholders/ investors. So it is unlikely that anything will be allowed to happen that will harm existing policyholders in any way.
Controversy to be welcomed
This controversy is to be welcomed since it raises certain basic issues which need to be debated and finalised, no matter what the outcome of the court battle is. It is a needless controversy that should have been settled outside the public gaze. It affects millions of people who do not understand the issues involved and panic unnecessarily about the safety of their money — which is not an issue at all — or worse, may loose faith in the instrument itself. It is inevitable that the transparency and costs norms are bound to improve significantly irrespective of what happens in the court battle.
Even as both regulators stress that their ultimate objective is to protect the interests of the investing public, the feud is likely to confuse the investors. If the conflict lingers it would also send wrong signals to the market as funds collected through ULIPs get invested into the equity market. And also the controversy could well be is a turning point in the regulation of India’s consumer finance products.