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The dispute between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) over unit-linked insurance policies (Ulips) is essentially a jurisdictional issue - that is, it calls for deciding as to which regulator should regulate Ulips.

Ordinarily, in the absence of a super regulator, the government, probably the finance ministry or the law ministry, should have arbitrated on the matter and brought amendment to the respective Acts. Better still, since the issue is technical, the government should have appointed experts to demarcate the jurisdiction in unambiguous terms, and then amended the statutes. The government's decision to direct the two regulators to approach a court to sort the matter is clearly wrong. The courts can give a decision only on the basis of an existing statute.

Two things are very clear from a perusal of Section 11 of the Sebi Act, 1992, and Section 14 of the Irda Act, 1999: One, there is no overlapping of jurisdictions of the two regulators and two, there is no explicit statutory reference to Ulips. Therefore, we need to see how the jurisdictions of the two regulators become applicable to Ulips. Ulips are insurance contracts between an insurer and a policy holder, whereby the insurer agrees to transfer the risk (of death of the life assured) from the policy holder to itself in return for the payment of a specified premium. The premium paid consists of two parts - one, a risk premium which is the price of risk transfer and an investment component which the insurer invests in specified securities on behalf of the policy holder.

The investment component of the premium and the corpus that it accumulates into are intrinsic parts of the insurance contract and cannot be treated as a separate investment, for two reasons: One, the insurer has claim over the corpus in terms of actuarial valuation of the corpus, and two, the insurer may protect the payment of premium itself against the death of the life assured, in case the policy holder has opted for a "waiver of premium" rider. Thus the investment component in an Ulip is an integral part of the insurance contract, and its existence does not change the nature of the contract.

However, the fact remains that through the investment component in an Ulip, the insurer transacts in the security market. If so, the insurer needs to abide by all the norms that govern the securities market. At present all insurers abide by these norms as far as the front end of the transactions is concerned. But the back end of the transactions, that is fund management, remains outside the purview of the securities market regulator. This is the area which should have come under the purview of Sebi, but does not at present. Rather than keeping the fund management with the insurer and bringing it under the purview of Sebi, a better option would be to transfer fund management to professional portfolio managers like mutual funds, as has been done in the case of the New Pension Scheme.

Here again, the reasons are two: One, the core competency of insurers is personal risk management, not portfolio management; and, two, such an arrangement will naturally eliminate any conflict between Irda and Sebi. Irda will regulate the Ulips as insurance contracts; Sebi will regulate the fund management done by the portfolio managers for insurers. The ultimate winner will be the policy holder as she will get the best of both the worlds-Irda will protect her interests as a policy holder and Sebi will protect her interests as an investor.

Source: DNA Money