Articles

The government's decision to intervene with an ordinance on unitlinked insurance plans (ULIPs) has not come a day too early. Although ULIPs are neither of national or political significance, the dispute over who regulates them had reached farcical proportions with Sebi and Irda issuing contradictory directives to a Rs 10-lakh-crore industry. Fortunately, with the government's ordinance putting to rest the dispute, the time has come to focus on the real issues. In a more mature industry like banking, regulations usually follow a pattern. Central bankers first flag the issues in public speeches, and this is usually followed by public debate and the appointment of a committee. Based on the committee recommendation, draft guidelines are issued, which are finetuned following feedback from the industry.

The battle with Sebi has, however, forced the insurance regulator's hand and compelled it to issue a host of new regulations which will change the way ULIPs are positioned. Some of the regulations are still proposals and there is scope for debate on some of the issues.

REDUCTION OF FRONT LOADS

This debate is not new. In the UK there was a similar backlash against front-end charges on pension plans, resulting in the regulator placing an overall cap. In India, the NPS pension plans too have products with zero-load structure. More recently, mutual funds have been made zero load. Some life companies have been offering policies online at much cheaper rates. The response to none of these direct sales initiatives are really encouraging. So now, the debate is about whether it will be possible to sell life policies with low margins or whether India can be an outlier in insurance distribution and sell products through low-cost channels rather than agents.

COMPULSORY PROTECTION

The present trend of regulation is aimed at making a certain level of protection mandatory. The downside of such a requirement is that for an individual in her 50s (the age group which has the maximum level of earnings and wealth), insurance is not a viable option for investment. In some countries of the West, individuals are encouraged to take insurance for wealth management through fiscal incentives. For instance, benefits bequeathed through a whole life policy are not taxed while there are estate taxes on other financial assets that are inherited. The debate then is whether insurance should have a role in wealth management?

COMPULSORY ANNUITISATION

In India, pension plans were always subject to the condition that the maturity benefits would be used to buy annuities. Somewhere along the line insurers managed to obtain the flexibility of giving policyholder full surrender benefits before maturity. Clearly this is an anomaly. But one area that needs attention are the annuity products. The best of the whole life plans without return of principal give a monthly return less than a fixed deposit. There is enormous scope to look at development of products that will generate better returns.

MIS-SELLING

A key difference between life insurance and any other service or product is that its benefits can be experienced only many years from the date of purchase. In a competitive market all businesses try complex combinations to better position their products (soapmakers cutting down on total fatty matter, potatochips makers reducing the weight of a Rs 10 pack). But in all such cases the changes are immediately experienced by the buyer who can shift. In insurance, policyholders get the benefits only when they retire. Given the low level of sophistication among buyers, the advantages of having at least one standardised product could be debated.

FINANCIAL LITERACY

The most vulnerable victims of mis-selling are not those with access to the media or the regulators but those who are not aware that they have been cheated or do not know about the redressal mechanisms. Governments in countries where the world's financial centres are located spend millions on financial literacy. The UK, for one, has set aside the equivalent of € 13 million to promote financial literacy. Canada has a budget of $5 million; other countries such as the US and Canada also have commissions to promote financial literacy with government funding. One of the best weapons against mis-selling is to increase financial literacy. Given the size of the insurance industry, significant resources can be generated by allocating unclaimed premium from lapsed policies to a central fund.

CORPORATE GOVERNANCE

Bank depositors can draw comfort from the fact that their balances are protected by the Deposit Insurance Corporation. In the case of policyholders, any hole in the balance sheet of a life company has to be filled from shareholders' funds. Transparency in respect of balance sheet strength is highest among listed companies. But there are many chief executives who say that listing puts pressure on management to focus on quarterly profits rather than on long-term gains.

SELF REGULATION

Finally, matters would not have come to such a head if the insurance industry had been proactive in addressing concerns on its own. So far, unhealthy practices by life insurance companies have come to light not because peers have raised their voice against them, but because rivals rushed to emulate such practices, prompting the regulator to step in. In recent years, the life industry has defended some of the most indefensible practices ('mis-selling is inevitable', 'it's worthwhile training only successful agents', 'we need critical mass before implementing best practices', 'all companies pay out overriding commissions'). Had the industry not indulged itself in a race to the bottom, it would not have had to witness a regulatory crackdown.

Source: http://epaper.timesofindia.com/