As the new regulations for ULIPS (Unit Linked Insurance Policies) came into existence on September 1, 2010, the Indian insurance sector is set for a process reform. The ULIPS have been made more user-friendly and there seems to be a reason to worry for the insurance companies, especially for the ones who have not been able to break-even till date.
On one hand, this step would bring in the standardization in the ULIP segment on the other it would also heighten the competition in the industry. The key factors recognised by the industry experts are investment performance, service, brand, product design and agents’ training. All this is sure to make the sector more efficient and would remove the redundancies.
The companies are now looking towards consolidating their portfolios, thereby reducing the number of plans which are made available to the public. Again as yearly charges have been provided with an upper limit (cap), the companies do not much options and this would result into similar products from the different companies. Another differentiating factor for the insurance companies lost.
For the insurance companies this would mean a bleak short term outcome. The regulation would indirectly affect the medium term profits for the companies as they would have to fight to maintain even a decent persistency ratio.
Persistency ratio is defined as the ratio showing the percentage of policies that continue paying premiums rather than cancel policies. With the new regulations, the penalty for cancelling a policy has been reduced to 4-6% of the annualised premium as compared to 20-50% previously. The penalty amount has been a major driving factor in making investors stick to their policies. With this changed, the companies are in a real fix to maintain the ratio and thereby their mid-term returns.
Controlling of charges would in itself be an attracting factor for the investors and the increased returns would thus infuse the needed capital in the sector. Increased quality of service is being seen as a direct by-product of the regulations.
The Insurance Regulatory Authority of India (IRDA) has allowed the life insurance companies to extend loans against ULIP. The duration before which money can now be withdrawn from the ULIP has been extended from 3 to 5 years. This would have made ULIP unattractive to investors looking for short-term liquidation, necessitating the option of loans. The interest rate has been pegged at SBI base rate + 7%, compounded semi-annually. The proposal has also given detailed guidelines for the loan disbursement (circular issued by LIC in June 2010). The maximum loan amount was capped at 40% of the net asset value in ULIPs where equity accounted for over 60% of the total portfolio while in case of policies where debt instruments made up more than 60%, the ceiling stood at 50%.
Speaking at an insurance summit organised by industry body Assocham, Mr Harinarayan said IRDA would be coming up with new regulations on ‘bancassurance’. Most insurers expect the regulators to break the exclusive deals that insurers have with banks for selling insurance. It is also expected that the regulator will put in place norms to ensure that banks continue to service policyholders even if they decide to discontinue their insurance partnerships. It has also been seen that even though the capital brought in by private players have been 31,000 crores the net worth is only 11,000 crores due to the increased cost of acquiring one unit of premium.
Proposals for creation of a transaction platform to facilitate placement and settlement of reinsurance transactions have also been submitted to the IRDA.
All these factors would culminate into requirement of higher working capital as the companies would now have to fund more of their services at lesser of the charges.
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