>LIFE INSURANCE: IRDA’s final guidelines: Near-term pain, long-term gain

Continuing its focus on bringing uniformity in product features and improving disclosures, the Insurance Regulatory and Development Authority (IRDA), today, came out with final guidelines on ULIPs, encompassing the entire spectrum of product features and charge structure. These guidelines will be applicable from September 2010 (against the earlier deadline of July 2010).

KEY CHANGES
• Lock-in period and premium payment term raised to five years. Further, life/health cover is made compulsory for all products (excluding pensions and annuities), strengthening long-term protection feature of the instrument.

• All pension products to guarantee return of 4.5% to protect the lifetime savings from adverse fluctuations at the time of maturity.

• So far, capping of charges applied only on door-to-door basis at 3% for 10- year policy and 2.25% for 15-year policy; this is now fixed at 4% in the sixth year, dropping to limits prescribed earlier as the policy tends to maturity. Distribution charges to be spread evenly over the lock-in period to eliminate front loading.

• With the perspective of ensuring that only acquisition expenses are recovered in the event of discontinuance of the policy, surrender charges have been capped. Surrender charge will be much lower than the current levels.

OUR VIEW
• Directionally, IRDA has attempted to make ULIP a long-term protection contract covering risks related to mortality, longevity and health, and at the same time offering a fair deal to the policyholder, doing away with the excesses in the system.

• Clarity on charge structure facilitates pricing and setting up reasonable longterm assumptions.

• In line with expectations, capping of charges will impact margins adversely. However, capping of surrender charges is a bigger blow compared with capping the difference between gross and net yield, as it would not only restrict the ability to generate revenue, but also raise the persistency risk borne by the insurers.

• With limited product differentiation, having low and variable cost business model will be critical. This, in turn, will lead to cost cutting across the sector, impacting distributor commissions adversely.

• Stringent capping of charges will make products cheaper and more attractive, a big positive for volumes in the long run.

• However, in the near future, some negative impact on volumes is possible as:
a) insurers will not be able to cater to market for short duration products and
b) lowering of distributor commissions will make selling ULIPs uneconomical for marginal distributors

• Insurers will try to push as many ULIPs as possible before new norms set in.

• With all pension plans carrying guarantees, there will be a shift towards fixed income securities in life insurers’ AUM.

To read the full report: LIFE INSURANCE