Irda needs more than good intentions to clean up products….Deepti Bhaskaran
What strengthens my conviction is the several rounds of alterations that products see
What strengthens my conviction is the several rounds of alterations that products see
In 2007, Insurance Regulatory and Development Authority, Irda, asked life insurance companies to phase out actuarial funded unit-linked insurance plans or Ulips. The crime of this category of Ulips was that it was too complicated for the buyer. It took the regulator a couple of years to prohibit these products and the ensuing din on how the affected insurers would fill the gap obliterated one moot question: why did the regulator clear such products in the first place?
Despite stringent guidelines, this product slipped from right under the nose of the regulator and found its way into the market only to be pulled out later. Sadly, this is not a one-off story, but a trend. Five years hence and more than 12 years into being a regulator, Irda still struggles to nip the problem of notorious products in the bud. Products still follow the unnatural course: the regulator clears them first, they hit the market, confuse the buyer and the seller and only then does the regulator takes cognizance and snaps into action.
Take the example of two more insurance products that charted the same course. One, in which the insurance component (typically the sum assured or the death benefit that a beneficiary gets) was essentially the sum of premiums accumulated at a certain rate and the maturity benefit was at least five times the annual premium paid. Here the maturity benefit was dressed as the sum assured to make these policies eligible for tax benefits. Till the last financial year, to be eligible for tax benefits, the sum assured needed to be at least five times the annual premium. Even as these products have been around for some time, the regulator took note only recently. It just took a small clause in the Finance Bill FY12 to rectify them. The Bill simply added a clause that sum assured will have to mean death benefit to make these products eligible for tax benefits.
The second product is the highest NAV guaranteed Ulip. This Ulip got sold as an insurance policy promising the highest return from the stock market even when the product allowed investments in debt. Ulips, which usually invest in the stock market, promised the highest NAV to policyholders. This should have been a red flag. But it took a couple of years for the regulator to take note of how these products morphed themselves into a mass weapon of mis-selling.
So why is the regulator still adopting the trial and error approach? Two possible answers come to mind: the regulator is being arm-twisted by the insurers or there is abject paucity of talent in the regulators office. I am inclined to believe it is the latter considering how insurance products are banned or modified after they hit the market.
What strengthens my conviction is the several rounds of alterations that products see. Ulips are a classic example. In 2009, the regulator attempted to clean up Ulips by bringing in some alterations and cost caps, but it was three rounds of guidelines on Ulips and a face-off between Irda and capital markets regulator, Securities and Exchange Board of India (Sebi) later that the regulator got it right in 2010.
Irda is into the second round of product clean-up exercise; the focus this time is on traditional plans. The regulator seems determined to get it right before any guidelines are formally announced. Thats a step in the right direction. A product head of a private insurance company tells me that so far the regulator has drafted and modified some six versions of the guidelines on traditional products and each time the draft is circulated in the industry for feedback. Having seen the drafts, I would say that the regulator has rightly picked up on all that is wrong with traditional plans. But the lack of talent is still on display.
Here is why. The regulator has come up with a new category of products called index-linked insurance plans or Ilips (once again the guidelines have followed the product launch) in order to give a regulatory framework to a certain kind of traditional products.
These products currently offer a minimum guarantee and peg additional guarantees to government securities (G-secs) yields. The costs are embedded in the product making it difficult to get a handle on the benefits. According to the latest draft, Ilips can peg the returns to an index, but the cost of insurance will need to be explicit; other costs will get reflected as the reduction in yield vis-a-vis the index and this reduction in yield will need to be defined upfront.
Even as the regulator is keen to bring them under a new set of guidelines, a valid question is: are the new rules needed? Products such as Ulips are already guided by rules on costs. So in the presence of an existing framework that monitors costs in transparent products, which define costs and enable policholders to track investment return, the rationale for a new set of guidelines is hard to understand.
Even if the regulator prefers collapsing all charges, except mortality cost, into one as a final reduction in yield in Ilips, it seems to have missed out on cost caps. Also, the regulator needs to ensure that Ulips that invest mainly in equities dont get sold as Ilips, circumventing the cost caps.
The good news is that these proposals are still in the draft stage and one can only hope that the regulator will get it right this time at the product approval stage itself and not pick it up after market reaction.
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