IRDA norms could cap charges on life policies

The Insurance Regulatory & Development Authority (Irda) is planning to cap the charges on universal life policies, or ULPs. These have almost replaced unit-linked insurance plans (Ulips) in terms of new business. Ulips, which used to account for around 80 per cent of the segment, lost their sheen after the regulator brought in stringent norms from September 1.

"We are planning to cap the charges on ULPs, which are similar to Ulips and have a component of traditional plans. We have received complaints from various sections of the industry claiming that some companies are selling them as Ulips and overcharging policyholders. We want to plug all loopholes," said a senior Irda official.

Guidelines on ULPs will be in place by next week, the Irda official added. J Hari Narayan, chairman of Irda, had conveyed last week that every product would be tested for fairness and robustness and only then would they be permitted on the market.

According to present guidelines, commissions on a single premium are capped at 2 per cent. On pension products, they are capped at 7.5 per cent, while on any other insurance product they can go up to 40 per cent.

After the September 1 changes to Ulips, commissions to agents declined to 7-9 per cent from 12-15 per cent. The industry expects volumes to pick up, as the new norms boost policyholders' confidence.

So far, there have been no separate guidelines for ULPs, which are complex, hybrid products. For example, unlike Ulips, there is no unitisation of funds. But other features are similar to Ulips. For instance, after the deduction of mortality charges, the remaining portion of the premium amount is invested in bonds and equities.

ULPs are unique in the sense that policyholders have the flexibility to change the premium, sum assured and the term of the policy during the tenure.

"Irda has not cleared any ULPs in the last three-four months. The product is under Irda's scanner. Agents are pushing them to earn a high commission," said Sanjiv Pujari, an actuary appointed by SBI Life. 

Another executive expects the regulator to come down hard on this product. "There have been complaints about ULPs being sold under the guise of Ulips," he said.

But there are some who defend ULPs. "There is no need for separate guidelines for universal life. This is not a very complex product. We don't disclose the net asset value like Ulips, but the expenses are explained upfront," said a chief executive officer of a life insurance company.

He added that insurance companies have been selling the products before Ulips were launched in India and have been following the traditional guidelines.

The mutual fund industry, after shifting to a zero-load structure last year, complained that agents and brokers pushed only Ulips because of the high commissions. Soon after, Irda capped the overall charges on these products. To avoid such a situation, the regulator has decided to address the issue proactively.

Also, a committee headed by D Swarup, former chairman of the Pension Fund Regulatory & Development Authority, had recommended shifting to a no-load structure, where a buyer does not pay a commission on any financial product.