There were some announcements recently by the Life Insurance Council, a lobbying body formed by life insurance companies. Broadly, these announcements appeared to say two things: that the terminology of unit-linked insurance plans (Ulips) would be made uniform and that insurance companies would refuse to underwrite insurance-linked schemes issued by mutual fund companies.

Behind these announcements is the ongoing struggle between life insurance companies and mutual funds. Mutual funds and life insurance are two distinct products, one intended as a savings vehicle and the other a safety net. However, this distinction has blurred over the last few years. Indeed, one gets a feeling the life insurance companies are also in the business of running mutual funds, categorised somewhat differently as unit-linked insurance plans (Ulips).

Ulips have a mix of characteristics of both insurance and mutual fund schemes.
Crucially, however, the mutual fund aspect of Ulips is regulated by the government under a very different set of rules compared with the real mutual funds.

From the investors’ point of view, the biggest difference between the two categories pertains to how much of his money is actually used for his insurance and his savings and how much is taken away to pay commissions to agents and towards the insurance company’s expenses. The second big difference is in the quality of the information he is given about his investments.
Mutual funds deduct less than 2.5% as the agent’s commission. And as per current norms, there is no deduction if investors don’t use an agent and go directly to a fund company.
In Ulips, on the other hand, the agent’s commission varies, but in the first year, it could be as high as 25% and more.

Next is the issue of transparency.

There is a vast difference between the meaning of net asset value (NAV) of Ulips and mutual funds.

In a mutual fund, the NAV announced is net of all expenses and charges the fund company deducts. If your investments were worth Rs 1 lakh when a fund’s NAV was Rs 22, then it will be worth Rs 2 lakh when the fund’s NAV is Rs 44. That’s it.
The arithmetic of insurance companies is different. NAVs of Ulips are effectively pre-deductions. The NAV may double, but your investments won’t double because the insurance company will reduce the number of units you hold to pay for expenses and commissions etc. This means the announced NAV has no clear and transparent relation to what the unit holders are actually earning.

However, Ulips have been the more successful of the two. News reports say that last year, a total of Rs 55,000 crore was invested (if invested is the right word) in Ulips. In the same period, around Rs 16,000 crore was invested in mutual funds.
We are often told by the insurance industry that this is because Ulips are a superior product. That’s complete rubbish. Ulips are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising, all from the unit holders’ money. The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office deposits and many other asset types is ending up in Ulips, where a good proportion is diverted to pay commissions.

The direction India’s insurance industry has taken in the last few years amounts to regulatory failure. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to India’s under-insured masses. Instead, it has ended up focusing its energies (and capital) on selling expensive and opaque mutual funds dressed up as insurance.

It’s tragic that there is no move to even recognise that this problem exists. Indeed, even higher foreign ownership is on its way, supposedly because more capital is needed to Ulip the under-Uliped masses.

But, even the mutual funds don’t seem to be very interested in highlighting these issues, perhaps because many of them are part of financial conglomerates with flourishing insurance businesses.

It is therefore left to the investor to understand the issues and do what he thinks is in his best interest.

Assocham has projected that foreign direct investment (FDI) would increase by $460 million to touch $960 million in the insurance sector in the next two years.

According to the chamber, the insurance sector could only attract FDI of $217.97 million in the first five months of the current year. The country?s total insurance market is pegged at about $30 billion, of which FDI accounts for 1.6%. Assocham president Sajjan Jindal said that if the insurance sector is opened up to allow 49% FDI by 2010, its contribution to insurance would touch nearly $2 billion. Currently, only 26% FDI is permitted in the insurance sector.
The chamber has also projected that the insurance sector would touch $60 billion by 2012. India?s insurance market lags behind other economies in the baseline measure of insurance penetration, which stands at 3.1% for India as compared to UK (12.5%), Japan (10.5%), Korea (10.3%) and US (9.2%). Currently, FDI represents only Rs 827 core of the Rs 3179 crore capitalisations of private life insurance companies, the chamber added.

A strange argument in favour of ULIPs (insread of Mutual Funds)

Since Insurance is always sold and not bought, it requires considerable individual efforts to sell the product. The individual needs to be remunerated upfront which results in a seemingly higher cost. However as the product is sold for a longer term it gets amortised over longer period….

That is your Insurance Agent’s argument. Do you agree?

I find it absurd!

Kotak Mahindra Old Mutual Life Insurance Limited (Kotak Life Insurance) the life insurance arm of Kotak Mahindra Bank, today announced reduction in its term plan rates upto 40%.

The rate reduction is partly as a result of the reduced solvency margin requirements laid down by IRDA. A key player in both the Group Term Life and Individual Term Life businesses, Kotak Life Insurance is one of the 1st life insurance companies to pass on this benefit to the consumer.

With these reduced rates, for a 30 year old healthy male, a cover of Rs. 10 lakhs for a term of 10 years, the Kotak Term Plan cost as little as Rs. 182/- per month (excluding service tax).

The life insurance sector in India will largely be driven by the propensity to save among Indians, according to a report by market research firm, RNCOS, analysing the Indian insurance market.

This means that life insurance products with a higher element of savings compared to protection will be more popular with customers. Of this, unit-linked insurance products (Ulips) will account for over half of total life insurance sales in India because they package the benefits of life risk cover, investments, and a tax saving facility in a single product.

At present, Ulips are more common in urban population as rural population lacks awareness of these products. But rapid urbanisation, rising education levels and growing employment will help life insurers to exploit the untapped rural population in the future.

In addition, the development of more organised life insurance distribution channels like banks and other financial institutions will increase sales of Ulips because these financial institutions have their own established customer bases.

Customers will no longer get insurance covers bundled with mutual funds and many savings and investment products offered by banks. They may, however, continue to get insurance with credit cards and home loans.

After a recent dispute with mutual fund companies, which wanted to collect insurance premium by hawking policies along with their schemes, life insurers on Thursday decided to end the system of bundling on a host of financial products.

The decision taken by the Life Insurance Council, a self-regulatory body, is significant since some of its members have a common parentage with asset management companies.

At present, Reliance Mutual Fund and Birla Sun Life Mutual Fund, which were offering systematic investment plan (SIP) products with insurance policies, will stop offering the cover.

Insurance Regulatory & Development Authority (Irda) had also said fund houses desiring to sell insurance products should get a licence from Irda.

The Insurance Regulatory and Development Authority (Irda) has expressed its concern over the referral programme prevalent among insurers. According to a senior Irda official, some private insurance company agents and multi-level marketing (MLM) companies are misusing the scheme.

Though the concept was authorised by Irda, it believes agents riding on the new concept are not following the procedures properly.

The referral programme was a new concept started by private insurers some two years ago to facilitate sale of insurance policies by the existing agents, who in turn, reach out to prospective clients through an informal understanding with local networks. The informal sub-agent, in turn, gets a portion of the commission from the authorised agent.

Irda has come across cases where sub-agents have reportedly missold the policies since they are not properly trained. Irda is worried about such misselling of policies, said the official.

With 22 players in the market and counting, insurance companies have to distinguish themselves from their competition.

As most insurance advertising tends to focus constantly on life, security and benefits, making differentiation virtually impossible, and players are known by their heritage, size or trust, the values that they stand for are not coming through. It’s therefore vital for brands to realise exactly what they stand for and talk about it, says Ms Anisha Motwani, Executive Vice-President (Marketing), Max New York Life Insurance.

Max has launched a new campaign to communicate that the brand has been revamped to reflect the spirit of its modern Indian consumers. This consumer, as seen in research conducted by McKinsey Global Institute and Max, is younger, willing to take risks and unabashedly ambitious.

It’s to celebrate and partner this that the brand has changed its tagline to ‘Karo Zyaada Ka Iraada’ (expect more) from ‘Your Partner for Life’, said Ms Motwani, adding that the new campaign is reflective of the company’s transformation as it gears up to meet consumer expectations.

While the Hindi version of the campaign is already on air, South Indian language versions will break out this week. “Insurance is a category that does well with advertising – there is a consumer connect, and considering that each insurance company has between 50,000 and three lakh agents, the advertising lets consumers be more open to them,” Ms Motwani said.

Considering that there are various kinds of insurance products offered now – relating to health, education, children, Max believes it has to act like a typical FMCG brand and communicate the benefits of each product. While umbrella branding will stay, there will be different approaches to individual products’ advertising, she said. Max New York Life kicked off a branding exercise with Indian Railways last month. It has branded three South-bound Rajdhani Expresses and placed its agents on these trains to speak to the passengers.

With insurers slashing term plan premiums by up to 40 per cent, this is an opportunity for customers to shift from their high-cost insurance policies.

The best thing you can buy from an insurance company is – an insurance policy. However, we often end up buying high-cost endowment or unit-linked insurance plans (Ulips). The argument is that there should be some returns, at least from any investment.

Over the years, term plans have been shabbily treated by life insurance companies. No wonder they form a very little part of their overall sales. In fact, if one wants to buy it, most insurance agents would try to sell you anything but a simple term plan.

A term plan is the most basic form of insurance that offers only life cover and no maturity value. That also makes it the cheapest form of life insurance because the policy holder stands to lose his entire premium if he survives the tenure. For a 30-year old, the premium for a Rs 50-lakh cover for 20 years would come to a mere Rs 15,000 a year.

To promote them, the Insurance Regulatory and Development Authority (Irda) has reduced the solvency ratio requirement. The solvency margin requirements are prudential norms on the capital requirement for insurance companies. These margins ensure that insurance companies have sufficient money to settle claims and clear liabilities.

They are the equivalent of capital adequacy ratios for the banking industry. Obviously, a direct interpretation of this reduction implies that the premiums for term plans should come down. Though only two companies – Bajaj Allianz and Kotak Life Insurance – have reduced their premiums now, there are expectations that others will follow the suit.

All this should sound like music to insurance buyers. This is an opportunity to evaluate one’s expenses on insurance cover. Look at insurance as pure risk transfer and a risk protection tool instead of a money-making instrument. The basic purpose of buying it should be to take care of family needs, in case of an untimely death of the policy holder. Here are some tips on what you should be doing, in case you already have endowment plans and Ulips instead of term plans.

Mis-selling of insurance policies is a serious issue in the insurance industry, according to Mr J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority (IRDA).

The instances of mis-selling is significantly larger in the unit linked insurance plans (ULIPs), Mr Hari Narayan said.

“The incidence of mis-selling, however, has come down a little from 14 per cent in 2006-07 to 12 per cent in 2007-08. But still about 10 per cent of total complaints received by the authority are on mis-selling,” he said. But we cannot draw any conclusion based on this 3% drop. Misselling continues to be an issue.

Ulips are popular savings instruments as they offer protection in terms of life cover and flexibility in investments to the policyholder. A part of the premium is invested in equities or government bonds, depending on the choice made by the policyholder.

In most cases, the cost structure is front-loaded, with the bulk of the agents commission being paid in the first year. Hence, if a Ulip were to be sold to an individual with an investment horizon of only three years, most schemes are likely to result in generating returns lower than expected due to the front-end charges.

The regulator has now made it mandatory for companies to give a break up of all charges they have to pay and the exact amount that will be available for investment during the premium payment period.