"On the distribution front, guidelines have not brought in a positive response"
Life Insurance industry is going to undergo dramatic changes both in the products and the way they are sold following the introduction of new regulations on Unit Linked Insurance Plans (ULIP’s) with effect from September 1, 2010. Insurance watchdog IRDA has tightened the norms for ULIP’s after winning the battle with the markets regulator SEBI over control over ULIP’s. The new guidelines issued by the Insurance Regulator, IRDA for ULIP’s will cause an impact on the profitability of the insurers and bring down the ULIP sales.

However, these changes are actually for the betterment of the public but come as a mixed bag as the changes made with the intention and statement that they are for the betterment of the policyholders may cost them dear too.

These ULIPs are being positioned as Long Term solutions but some people were misusing the present 3-year norm and hence ULIPs were being sold as Short Term 3 year products. Now with the changes, they are clearly defined in the 5-year plus product category.

Some of the welcome moves are the allowance of a higher sum assured, which means higher protection for policyholders. Stricter guidelines for pension products would ensure lower mis-selling as these products were being mis-sold by some unscrupulous agents. Return guarantees will benefit pension investors who are approaching retirement. But for long term investors, a guaranteed fund, primarily debt, may not make sense and they will get much higher returns if they invest in ULIP with higher equity exposure and can buy an annuity later to get regular income.

Another welcome move is the cap on surrender charges. This puts the onus on the life insurance companies to ensure that their products are pitched as long term solutions, so that the clients who intend to pay the premium for a long term are encouraged to do so. The companies which were earlier allowing a bit of mis-selling in order to rake in lapsation profits may not be able to recover their initial expenses in respect of the lapsed policy now. But will this mean a stop to mis-selling for lapsation profits. Maybe not, as most of these policies are sold by multi level marketing companies and this loophole still exists in traditional policies and they may simply shift to traditional business.

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Source : IIPM Editorial, 2011.

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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