The regulatory battle is over, but will consumers win the war? Recently, the government decreed that insurance regulator IRDA would control all unit-linked insurance plans (ULIPs), thereby ending its bitter battle with market regulator SEBI, which wanted to extend its turf. But IRDA’s win comes at a price: the controversy raised pertinent questions about the ULIP product design itself. And thus it willy-nilly sets the stage for a major revamp of the much-sold (and mis-sold) staple investment option for Indians.
IRDA will soon bring in a slew of drastic measures in a bid to clean up and make these market-linked products transparent. These will be related to surrender charges, commissions, and upping the risk cover offered on ULIPs to almost double from the current level of five times the premium paid. Finally, it is also likely that every pension plan offered by insurers will come with a guaranteed maturity benefit so that even if the market collapses, investors don’t lose out when they retire.
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Eager to change the perception around IRDA, the regulator has even put out a draft on the idea of insurance agents doing a ‘need analysis’ for each customer based on factors like age, annual income, financial situation and needs, investment objectives and so on. “Some of this is already in place in the market through internal policies of the insurance companies, for the rest we are putting a standardised structure in place so that we can monitor the market conduct. We want agents to act as financial advisors to their clients, offering them the best product,” argues A. Giridhar, executive director, IRDA.
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All this is going to mean tough times for the insurance companies—they are going to have to deal with higher costs, for one. In a market which says mis-selling is part of the game (IRDA, for instance, won’t admit to rampant mis-selling of ULIPs), where agents are barely trained, having agents don the financial advisor cap to ensure the ‘right’ products are sold to the ‘right’ customer is definitely a tall order.
While the regulatory turf battle has not meant any change—as yet—for the lay investor, expect the debate over combining insurance and investment to continue. “By industry admission, the percentage of life cover offered under ULIPs is abysmally low, so it continues to remain a largely investment-driven product. IRDA needs to sort this out sooner rather than later,” says a mutual fund industry expert. With reason: SEBI has banned entry loads and reduced commission structures on mutual funds; the mutual fund industry has already seen a large outflow over the last two quarters.
Here’s the key: SEBI’s changes have benefited the consumer. And that is reason enough to force the insurance regulator to take a fresh look at its own product stable. “IRDA has to proactively stand for the consumer, which so far it has failed to do. Half the people who have bought ULIPs don’t understand them or fail to see that they have been mis-sold. How is that good for the industry or the regulator?” asks an insurance consultant. The time to act is now, to alter the tarnished image of the ULIP, to ensure that customers don’t lose out on protecting the future of their investments. Is the regulator going to do enough?