ULIPS: SEBI VS IRDA

Recently, India’s market watchdog SEBI banned 14 insurance companies from raising funds
from ULIPs, stating that they have not registered their product with SEBI, so they can’t issue
new ULIPs. The companies affected were: Aegon Religare, Aviva , Bajaj Allianz, Bharti
AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vyasa, Kotak Mahindra
Old Mutual, Max New York Life, Metlife India, Reliance Life, SBI Life and TATA AIG Life

What is ULIP?
Unit Linked Insurance Policy (ULIP) is a category of goal-based financial solutions which
combine the safety of insurance protectionwith wealth creation opportunities. Part of
the investment made by acustomer in ULIPs goes towards providing the
insurance protectionand residual portion is invested in a fund which in turn invests
themoney in stocks / bonds. The value of this part of the investmentalters with the
performance of the underlying fund opted by acustomer.

Thus the protection element and savings element are distinguishable in ULIPs and they are
managed as per the needs of the customer. ULIPs provide flexibility for the investors.

In Other words when a customer decides the amount of the premium to be paid and the
amount of life cover from the ULIP, the insurercompany deducts some portion of the ULIP
premium upfront. It is called Premium Allocation Charge. The premium Allocation charge
varies from product to product.
Fund Break UP:
The rest of the funds are invested in a fund or mixture of funds as chosen by the customer.
The investment is denoted as units and is represented by the value that it has attained called
as Net Asset Value (NAV).The mortality charges and ULIP administration Charges are
deducted further on a periodic basis (mostly monthly) and the ULIP fund charges are adjusted
from the NAV Value (Net Asset Value) on a daily basis.
The underlying investment is either in equity or in debt or in both of them. In other words the
investments may be in equity, fixed-return or a mixture of both. It depends upon the Risk
appetite of thecustomer. The fund value of the customer reflects the performance of the
underlying asset classes. At the time of the maturity thecustomer is entitled to receive the
fund value at current time of maturity. You may understand these facts by the following pie
chart:
Why ULIPs became controversial?
As we can understand from the above discussion that ULIPs have both Insurance
and Investment parts. There are ULIP plans which have no sum assured as well. Investments
are subject to market risks and Investment come under the purview of market watchdog
SEBI.Mutual Funds and other collective schemes are managed by SEBI. However Insurance
is regulated by IRDA.

Background of ULIPs:
The ULIPs were introduced in 1960s and they are popular in many countries including India.

India’s first ULIP was issued by UTI and LIC. The investment was by UTI and insurance
part covered by LIC.

The industry was open in 2000 and the life insurance companiesstarted selling ULIPs. There
was a boom in the share markets between 2005-2008 and during this time the ULIP’s
products outperformed themutual funds because of the combined benefits of insurance and
investments and marketing strategies of the companies. At present, an estimated 70% of the
new business premium for most insurance companies comes from the Unit Linked products.

After SEBI barred front loads on mutual funds in August 2009, MFs have been complaining
that insurers’ agents are luring away customers looking for market investments. These agents
receive higher front-end commission than what MFs’ agents are allowed.

Another main issue with ULIPs is of mis-selling, where the agent does not tell the
policyholder that he stands to lose if he does not renew his policy annually. Also, in some
policies, the returns are back-ended in the form of an assured loyalty bonus in the last year. If
this is not communicated to the policyholder and he withdraws early, he stands to lose
substantially.

In December 2009 and January 2010, SEBI had issued show cause notices to 14 insurance
companies asking them why action should not be initiated against them for
issuing investment products without SEBI’s permission.
On April 9, 2010, SEBI whole time member Prashant Saran passed the order putting a ban on
ULIP products by these 14 insurers.

ULIP: Good versus Bad

In India the investments in ULIPs is covered under section 80C of Income Tax Act. In ULIP
products Fund managers get more time to hold stocks because of the lock-in period and there
are negative points for customers such as high costs like premium allocation charge, policy
administration charge, and mortality rate. Besides, the benefits under Section 80 C go away if
the holder surrenders the policy within 3 years.

ULIP: Insurance versus Investment:

The purpose of buying an insurance policy is that if the policy holder dies, the family is
assured of certain amount. Since ULIPs are market Linked, there is uncertainty in this benefit
and the ULIPs may defeat this benefit. In case of untimely death of a customer, the family is
entitled to get the higher the sum assured or the market value. Then there are many variants
of these schemes which guarantee cover five times or two times of initial premium or so on.
There are many ULIP pension plans which don’t give any cover or sum assured.

Apart from this, the costs are deducted from the units and returns get reduced because of the
reducing units. Even in the situation of good market conditions the and higher NAV, the
benefit is reduced because of the unit associated costs.

Contentions of SEBI:
One of the main contentions for SEBI was that although a ULIP is an insurance product
which comes under IRDA, part of it is also aninvestment product which should ideally be
regulated by SEBI.TheInsurance Companies which started selling ULIPs about 5-6 years ago,
offered huge commissions to insurance agents and flooded the market with these products
which nearly mirrored mutual fund (MF) products. The commissions on ULIPs are as high as
30%.
SEBI says that since ULIPs are investment products which mimicmutual funds so they
should follow it’s guidelines. There is one aspect of SEBI’s action to curb the high
commissions and ULIPs compared toMutual funds. SEBI said : “Such products, which work
in a similar way as mutual funds, should not be launched nor should money be raised from
investors by way of new or additional subscription, till companies obtain the certificate of
registration from SEBI” SEBI act clearly says that any product with exposure to the securities
market comes under its purview. In this context, SEBI had issued show cause notices t0 14
companies on sale of Unit Linked Products without obtaining it’s approval. SEBI is said to
have obtained the views of the Attorney General of India on the powers vesting with it to
regulate ULIPs.

IRDA’s Viewpoint:
IrDA responded by saying that SEBI does not have the jurisdiction to regulate ULIPs. Further
IrDA also says that there is no case for dual regulation of ULIPs. A day after SEBI barred the
companies IrDA mandated to ignore the SEBI’s order and directed them to continue selling
the product. IrDA, as per reports in newspapers , sought a legal opinion from NKP Salve,
eminent jurist and former Union minister, before clarifying its position.

Ministry’s Role, Lifting the Ban & Current Status:

SEBI lifted the ban after the SEBI officials and IRDA officials met Union Finance Ministry
officials. The Finance ministry restored status quo. The SEBI and IrDA agreed jointly to seek
a legally binding mandate from an appropriate court. Now there is no ban on insurance
companies providing ULIPs policies as part of an insurance policy