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Clark Troy has worked in the financial services world since 2000, and is currently a Financial Advisor at DWM Advisors, registered investment advisor in Durham, NC. He has completed the educational and exam requirements towards a CFP® certification. He worked for years as a management consultant... More
  • Decision Time in India: ULIPs are Insurance 0 comments
    Jun 29, 2010 12:47 PM | about stocks: AIG, AEG, AZ, AXA, AV, FORSY, ING, MET, PUK

    As I have discussed in an earlier post “Asian Regulatory Battles for Insurers” and in my published report “Regulatory Currents in Indian Life Insurance:  Protecting Investors and Paying Producers” a protracted tussle over who would regulate Unit-Linked Insurance Plans (ULIPs) has been going on in India.  ULIPs are variable life and annuity products that have constituted a considerable majority of the booming Indian life insurance market in recent years.  They have been popular for a number of reasons, not least because they have given Indian retail investors a tax-advantaged way to invest in India’s capital markets.  They have been particularly popular with India’s 3 million odd insurance salespeople because they offered an opportunity to book a high-commission sale.  They became even more popular with the agent community after mutual funds, which had been similarly profitable to sell, were made a fee-only product in August of 2009. With the incentive to sell removed, Indian insurance agents / financial advisors (minimal licensing requirements make it easy to be both) chose to sell the more lucrative ULIPs.


    ULIPs had always been regulated by the Insurance Regulatory & Development Authority (IRDA).  In April India’s capital markets regulator, the Securities and Exchange Board of India (SEBI), which had been saber-rattling over ULIPs, issued an edict that the products should be brought within its mandate.  The next business day, the IRDA rejoined that SEBI had no  authority over ULIPs, and that insurers and distributors should carry on as usual.  However, fear and confusion reigned as insurers and regulators tried to figure out what to do, and the issue escalated to India’s Finance Minister and Supreme Court.


    Last week a decision was finally reached on jurisdiction over ULIPs.  They remain the sole province of the IRDA, in a rebuke not only to SEBI but to a reformist faction spearheaded by Dhirendra Swarup, the former head of the Indian pensions regulator, and much to the surprise and consternation of India’s burgeoning if not nascent financial planning and education communities. 


    However, the battle has not been fought entirely in vain.  Just yesterday the IRDA came forward with a set of regulatory changes to ULIPs (go to IRDA web site, look under "What's New").  Effective September 1, 2010, the regulator has reduced the maximum fees and commissions associated with the products, extended their lock-in periods, and mandated that higher levels of insurance cover to be included in them.  In general these modifications make the products more consumer-friendly, less profitable for insurance agents, and less susceptible to churning.


    The Indian insurance community is, quite understandably, still digesting the changes.  Certainly implementing changes by September 1 does not seem like an easy task.  In an interview with the Times of India Max New York Life CEO Rajesh Sud states that, once the aggressive timeline is taken into account:  the other consequence of these changes is going to be redrawing of the distribution map, the product map and certainly the profitability map for the industry. We have always maintained that in the end the consumer must get a fair value proposition. We also maintain that we are against price controls in some sense. We now will be the unique industry in some sense that still maintains price control after what happens in the oil sector.”  Monika Halan, consulting editor of Wall Street Journal affiliate LiveMint, notes on her Twitter feed that many in the industry are unhappy with the cost impacts of the new regulations and that agents are worried about making a living under the new regime.


    As the dust settles, the new regulations will probably constrain growth somewhat for India’s life insurance sector and result in further professionalization of the India’s insurance distribution world.  From the perspective of long-term sustainability, this should be a good thing.  Though India’s  life insurers -- including joint ventures from such major Western insurers as Aegon, AIG, Allianz, AXA, Aviva, Fortis, Generali, ING, MetLife, New York Life, and Prudential PLC – may in the short term grow more slowly than has been hoped,  over time better regulation should help the industry provide greater value and foster trust.

    Disclosure: Index funds only
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