Chennai, April 12 (Inditop.com) The order of Securities and Exchange Board of India (SEBI) banning 14 life insurers from selling unit-linked insurance products (ULIP) is a wake-up call for the Insurance Regulatory and Development Authority (IRDA) to set its and that of the life insurers’ house in order, say insurance officials.
Though they do not agree with the manner in which SEBI issued its ban order Friday night asking life insurers to stop ULIP sales with immediate effect, officials of life insurance companies say something like this was needed to shake up IRDA.
“All is not well starting from the kind of products that are approved by IRDA to the way it is sold to the policy holders, the high commissions paid to the corporate brokers/bancassurance parters in excess of the legal stipulation,” a senior official of a life insurer told IANS on the condition of anonymity.
“It is really ironical that IRDA, which had asked life insurers to defy SEBI’s order, is talking about policy holder’s interests,” he said.
“The SEBI order is really a wake-up call for IRDA as to the kind of products it approves (many are purely investment products), the market malpractices and also the way it approves the appointment of top management of life insurers,” another senior official told Inditop.
“Life insurance is really a long-term business. But what we see and hear is the CEOs and marketing managers talking about top line growth, payment to distributors and paying scant respect to the interests of policy holders,” he added.
Last July, the IRDA was forced to come out with a regulation for capping the charges on ULIPs on the back of SEBI abolishing the entry load on mutual funds.
“However, life insurers have come around the regulation by offering the benefit only to policies that are held to maturity. Considering the fact that majority of the ULIPs are unlikely to be held till maturity, policyholders will not see any improvement in their value proposition,” an industry official told Inditop.
Many life insurers are resorting to dubious distribution channels like multi-level marketing companies. These companies operate pyramid schemes where there are no real policyholders, said another industry official.
He said the product needs to be simplified for all to understand while its cost has to be brought down.
“There should be standardisation terms and policy features so that comparisons become easier. Policyholders are now being ripped off by life insurers,” he remarked.
Citing the mutual fund industry that is doing well with a minimum paid-up capital of Rs.10 crore, a life insurance expert told IANS: “With 85 to 90 percent of the premium earned from selling ULIPs, there is not much of a difference between mutual fund and life insurance company.”
“Given this, one should wonder why life insurers are bathing in red with breaking even in near future. If only the life insurers’ cost over-runs are arrested – payment to corporate agents – then the ills of the sector will be cured.”
As much as 70 percent of the first-year premium is paid to corporate brokers like banks as commission.
The IRDA, which had asked life insurers to submit a statement of payment made to bancassurance partners sometime back, is yet to take action on the information it has received.
Had only IRDA listened to warnings of the Reserve Bank of India’s advisory group on insurance regulation in 2001 and also the committee headed by former chairman and managing director of New India Assurance Company Ltd A.C.Mukherje, life insurers would not be finding themselves in the current predicament.
The RBI appointed advisory group had indicated the possibility of life insurers engaging in mutual fund operations under the guise of life insurance by incorporating a token life cover in their schemes, and suggested that ULIP to be brought under the definition of life insurance business, in letter and spirit.
The advisory group had suggested close co-ordination between IRDA and SEBI to have an efficient ULIP business.
Citing the possibility of life insurers indulging in mutual fund operations, the Mukherjee Committee too had suggested that the insurance regulator should be alive to that risk.
In fact, SEBI in its order after checking a product sold by a life insurer had said the insurance component is mere two percent of the premium paid and the rest of the funds are used for stock market operations.
According to an industry official, the turf war would not have started if only IRDA had allowed outsourcing of investment operations or given link to other investment funds.
