We should have written this the other way around – SEBI (Securities and Exchange Board of India) to fight IRDA (Insurance Regulatory and Development Authority). But truthfully, IRDA does not really have a chance. It may be able to delay the inevitable, through going to court, but this had to happen. With MFs going no-load, there is no way insurance can charge what it does.
Coincidently, before the SEBI order, I had an intereting chat with the MD of a distribution firm. This is what he said:
We have a target of Rs 100,000 per month, per distribution agent. He can achieve this by maybe selling insurance to 6 clients, or by selling MF policies to maybe 200 clients. So it is a great challenge to prevent mis-selling (as in, selling the wrong insurance policies).
So you get the drift – insurance is too heavily incentivized, which creates a great deal of mis-selling. Thus, what SEBI is doing is in the right direction.
IRDA’s reaction to this has been an interesting one. It has come out vehemently against SEBI. See this paragraph from a press release on its site:
The observance of the above referred SEBI order would cause the stoppage of all renewals of insurance policies already invested by the insuring public, may result in the forced premature surrender of insurance policies causing substantial loss to the policyholder and to the insurers. The effective stoppage of the sale of the said products will cause a complete drying up of the revenue flows to the insurance companies which could disrupt the payment of benefits on maturity, on death and on other admissible claims, putting the policyholder and the general public to irreparable financial loss. The financial position of the insurers will be seriously jeopardized thus destabilizing the market and upsetting financial stability.
IRDA is pretty much admitting that selling ULIPs is the only thing that insurance companies do.
Disclosure: No positions