Sebi bans 14 insurers from issuing ULIP; IRDA questions

Market regulator Sebi has banned 14 life insurance companies, including those belonging to Tatas, SBI, ICICI, HDFC and Reliance Anil Ambani group from raising funds through unit linked schemes, a move on which insurance regulator feels that the firms should take legal recourse. Many of the affected companies said they would talk to both Sebi and IRDA on the issue, which has emerged as a bone of contention between the two regulators. Reacting to the order, IRDA chairman J Harinarayan said, "I don't think their (Sebi's) position is well founded." Insurance companies have to take legal recourse since the order was issued against individual companies and IRDA is not party to it, he said. Rejecting the arguments by insurance companies that ULIP schemes are insurance products, a view endorsed by IRDA, market regulator SEBI issued the order late last night. "...in exercise of the powers...I hereby direct ... the (14) entities not to issue any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new and/or additional subscription for any product (including ULIPs) having an investment component in the nature of mutual funds." Secretary general SB Mathur of The Life Insurance Council-- an industry association of life insurers-- said, "we will take it with the regulator on Monday." The players who have been prohibited from raising any further money include big players like SBI Life Insurance Company, ICICI Prudential Life, Reliance Life, Metlife India, Aviva Life, Tata AIG Life, etc. However, state-owned insurer LIC is not named in the order, which further said in case these entities wanted to raise funds through any such schemes they would have to obtain the requisite certificate of registration from Sebi. The Order was issued by Sebi whole time member Prashant Saran, said.

A Max New York Life spokesperson said, "We have not received any communication from Sebi. We would not comment on this news on Sebi's ban on ULIPs of some of the life insurers without receiving any communication from Sebi." Many other insurance companies officials, on the condition of anonymity, said they would approach IRDA on the issue before taking any call. Earlier in January, Sebi had issued a notice to these companies asking why they did not seek its permission before offering ULIP schemes. That time IRDA member R Kannan had said, "All the products sold are within the insurance regulation and it is a global practice." When asked whether the issue was taken up before the High Level Coordination Committee (HLCC)-- an inter-regulatory body on financial markets-- Harinarayan said it came up before HLCC, which directed that the matter should be resolved between the two regulators. Unlike conventional plans, ULIP schemes are financial products that offer life insurance as well as investment like a mutual fund. But, whether they could be considered as a mutual fund is at the centre of the heated debate between SEBI and insurance companies. In a reply to the notices sent by Sebi, insurance companies said that ULIP is a life insurance product and not covered under the definition of "securities" under the Securities Contracts (Regulation) Act, 1956. To buttress their contention, they said the predominant feature of a ULIP is insurance cover, which is dependant on human life and the mere existence of an additional investment feature cannot convert a ULIP into a mutual fund. They further contended that ULIPs have a mandatory insurance cover, which forms a vital and inseparable part of the product. Unlike mutual fund schemes, the products are interlinked with the life of the policy holder, these companies added. In its reply to Sebi's notice to insurance companies earlier, IRDA is also understood to have taken the stand that regulation of ULIPs by IRDA was well laid down and that it did not agree with Sebi's contention that insurers needed a certificate of registration from the market regulator for dealing in

ULIPs. However, Saran in his order said, "I conclude that ULIPs offered by the said entities are a combination of investment and insurance and, therefore, the investment components are in the nature of mutual funds, which can only be offered/launched after obtaining registration from Sebi." The other companies, against whom the Sebi had issued the order last night include, Aegon Religare Life Insurance Company, Bajaj Allianz Life, Bharti AXA Life, Birla Sun Life, HDFC Standard Life, ING Vyasa Life, Kotak Mahindra Old Mutual Life and Max New York Life. Share

C.

SEBI Vs IRDA on ULIPs

SEBI, after a very long time, woke up to the known secret that ULIPs are in disguise Mutual fund schemes, which were operated in full swing for so many years, thanks to the exorbitant commission paid to the agents and even made banks to forget who they are and act as a bunch of salesmen. In India, u visit any bank, (except for few PSUs), there is a 95 % of chance, that you will be marketed an insurance product or a mutual fund. The success of these products was just a tactical replica of what UTI did in its years of inception, clubbing the safety aspect to any product, and you can make the Indian customer wow, and put the risks involved in finer prints, which would require a magnifier to read and voila, you make millions in terms of profits. The issue in one line SEBI does not ban ULIPs but stops them until these ULIP schemes are regulated and they come under SEBI . Now, coming to the issue, which is heating up between the two regulators, SEBI and IRDA. As both of them are formed by special acts of parliament and are autonomous bodies, the issue will be more tensed by the counter move of IRDA ordering all the insurance companies to sell ULIPs irrespective of SEBIs ban. The issue of contention is the investment part in the ULIPs. SEBI says all investments which involves securities will come under its jurisdiction while IRDA says, they dont come under securities, but they are part of the insurance premiums. The Insurance companies say that,

The predominant feature of a ULIP is insurance cover which is dependent on human life and the mere existence of an additional investment feature cannot convert a ULIP into a mutual fund. Under a ULIP, units are only notionally allocated and not physically issued and the units are created for the purpose of determining the benefits payable under the policy and are not owned by the policyholder Under a ULIP, only the risk on the investment portion lies with the policyholder while the risk on the life insurance portion vests with the insurer. ( have you ever told this to the investor? :) ) It cannot be traded as like a mutual fund. It can only be transferred or under special circumstances, investors can redeem premium paid towards investment part . Unlike a mutual fund, a ULIP is not established in the form of a trust. The fund is held by the insurance company itself as required under the Insurance Act. Ancillary features such as fund management, fund management charges etc., are alone not sufficient to convert a life insurance product into a mutual fund scheme. (This is the response given by the companies to SEBI in response for its query.) What does SEBI say in response to these queries? Any person/entity involved in mutual funds or collective investment schemes or trading in securities for others should be registered with SEBI. ULIP offer document states that, these products are different from traditional insurance products The risk is borne by the investor for the money invested and subject to the risk associated with capital markets The product has characteristics such as fund management, fund management charges, switch and partial withdrawal options which are characteristics of mutual fund. The product is unit linked and money is raised from public through sale of units to them. This is a characteristic of collective investment scheme or a mutual fund. The contributions or payments made by the investor are pooled The contributions or payments are made to such ULIPs by the investor with a view to receive profits, income. The investment made by the investor in the ULIPs is managed on behalf of the Investor. The investors do not have day-to-day control over the management and operation of the ULIPs. All these are similar to mutual fund operations. And all the activities and literature related to ULIPs clearly state that they are predominantly investment options, combined with a small percentage of premium paid towards insurance of the investor. If you check the product brochures of few ULIP plans, you might not get to see more than 2-3 % of the premium will be directed towards life cover (or insurance or mortality charges as they are called). So a contract which makes 3 % allocation towards insurance and 97% towards investments, can be called an investment company or insurance company?

Finally, once these ULIP plans come under SEBI It will for sure regulate the commissions paid towards distributors/ agents and will make it a level playing field for mutual funds and ULIP plans Will clearly distinguish with insurance products & mutual funds Will save a lot of money for the investor (at least he will save 300 % towards charges - for ULIPs in a simple calculation, if he pays 100 Rs premium for 15 yrs, he would have paid 164 Rs as commission or charges, where as for the same amount invested in mutual fund, he would have paid less than 25 Rs.and another 30 Rs for same cover in a traditional insurance plan.) Who knows, the insurance companies will stop marketing ULIP plans aggressively, and of course, the frontline bank sales men would be yielded to more pressure, as their revenue might come down, but the targets will remain the same

What is SEBI & IRDA issue all about? How it actually originated? The IRDA was formed before SEBI and with the help of IRDA insurance companies came out with aJugaadu product called ULIP which is just identical to MF with one minor difference that apx.2-5% of a clients investment goes to provide a life cover and rest is invested in either market, Govt. Securities, corporate debt or Equity, depending on the mandate of that fund. Now the second part is nothing but just like a mutual fund scheme. Where is the problem now? There is no problem with it as 90% of insurance premium world over goes to market or securities. However, in India the ULIP products become terrible investment products because if one invests Rs.100 in a ULIP then 20% of your money goes into commissions and approx. 2% into insurance, only 78% of ones money is invested in market or securities. So to get back to 98 ( 100 2 ) it would take in normal market conditions at least 2 years in Equity oriented funds and 4 years in debt oriented funds. So all you are doing is just recovering your principal in next 2 to 4 years. Now, themiss-selling by an insurance agent gets hidden in the bull run and because of rampant financial illiteracy even among so called highly qualified professionals & corporate executives leave alone the advisor selling the ULIP, the investor is fooled into putting more money in these bull runs saying that your money will double in x years and in the bear runs when the ULIP loose even their principal, the advisor gives them a either long term talk or plays on the investor fear and switches them to another products. Hence, an advisor in India is the a true definition of an opportunist. In the bull run he plays on the greed of the investor and in the bear run he plays on the fear of the investor.

What the above does is that apart from loss to investors it gives an unfair advantage to insurance companies compared to mutual fund houses where commissions are in fraction of your investments. What is the incentive for an advisor or even big distributors like banks & distribution companies to sell MF schemes when they have the option of selling a similar scheme where they gets heavy commissions as an agent what would you do go for Rs.20/- commission on ULIP or Rs.1 on Mutual Fund Scheme on an investors investment of Rs.100/-. Now, taking stock of the above problem SEBI has gone for an eagle eyes view of the whole problem and to create a level playing field among all market participants.After a lot of cajoling & convincing IRDA which failed to budge, SEBI issued the harsh step of issuing an quasi-judicial order restraining Insurance companies from offering ULIP without proper registration with SEBI. What will happen now? Though there is likely to be a stay on the SEBI order given the large number of clients who hold ULIP products by the high court. This can be a short-term breather to insurance companies but it is not a long-term solution. Who is on strong wicket when the issue goes to Court SEBI or IRDA? Mr. Bave is a master strategist, he knew that the lobby of insures is very strong and united and it will take him years to bring them to negotiating table. With the powers conferred to him by parliament, he issued a quasi judicial order. Now, quasi judicial order is such that even Mr.Bave cannot revoke it. The IRDA may win a temporary relief in this war, but SEBI stands on a strong footings as in the court of law the court will go where investor interests remains. Insurance companies must see the larger picture and rather than worrying about loosing valuations post an unfavorable order, they must prepare them self to change with the times. What are the implications of the SEBI & IRDA issue for Financial Planning profession? So lets come back to the question whats in it for Financial Planning profession ? In my opinion, realizing the investors interest the court will rule in favor of SEBI, post which Insurance companies will have to bring down the commissions to Mutual Fund level on ULIPs. Is this is a good news for Financial planners? Yes, but how many of us are changing as fast as the opportunity provided by structural changes effected by such orders? Time & again it has been proved that great opportunity lies when you have big structural changes in an economy. Every century gives some opportunity during financial turmoil and this time we are in the midst of such an opportunity.